Estate Taxes – Federal & State Exemptions (2026)

Category: Estate Planning | FinSeniors, Worthune.com

Here's something that surprises many people: the vast majority of Americans will never owe a penny of federal estate tax. The exemption amounts are so large that only a tiny percentage of estates — typically those worth tens of millions of dollars — actually face the federal estate tax. And yet estate tax planning dominates many conversations, sometimes at the expense of issues that affect far more families.

That said, state estate taxes are a very different story, and understanding how the two interact can meaningfully affect your planning — especially if you live in certain states or have a larger estate.

The federal estate tax applies to the taxable value of your estate at death. The key protection is the lifetime exemption — the amount you can transfer to heirs free of federal estate tax. For 2026, the federal exemption is approximately $13.99 million per individual (indexed annually for inflation), or roughly $27.98 million for married couples using portability.

Estates below the exemption amount owe zero federal estate tax. Estates above the exemption are taxed at rates up to 40% — but only on the amount exceeding the exemption. In practice, fewer than 1% of estates pay any federal estate tax.

💡 The elevated exemption amounts are scheduled to sunset after December 31, 2025, potentially reverting to approximately $7 million per person (inflation-adjusted). Legislative action may extend or make permanent the higher amounts. This is an active planning issue for larger estates — consult your advisor for the latest.

When the first spouse dies, any unused portion of their federal estate tax exemption can be transferred to the surviving spouse — but only if the executor files a federal estate tax return (Form 706) within nine months of death (plus a six-month extension if needed), even if no tax is owed.

This is critical: without a timely filing, the deceased spouse's unused exemption is lost permanently. Many families with estates in the $10–25 million range have missed this deadline without realizing the long-term cost.

Assets passing to a surviving spouse who is a U.S. citizen are completely exempt from federal estate tax — no limit. While enormously valuable, it's a deferral, not an elimination: the surviving spouse's estate will eventually face estate tax on everything above the exemption.

This is why estate planning for married couples often involves strategies to use both spouses' exemptions effectively, rather than funneling everything to the survivor and concentrating the tax problem in one estate.

The federal estate tax and the federal gift tax share the same lifetime exemption. Taxable gifts made during your lifetime reduce the exemption available at death. However, annual gifts below the annual exclusion don't count against the lifetime exemption.

The annual gift tax exclusion for 2026 is $18,000 per recipient. You can give up to $18,000 to as many people as you like — children, grandchildren, friends — without any gift tax consequence. A married couple can give $36,000 per recipient per year through gift-splitting.

While federal estate taxes affect very few families, state estate taxes are far more common. Twelve states and the District of Columbia currently impose their own estate tax, most with exemptions well below the federal threshold:

Six states impose inheritance taxes (on recipients, not the estate): Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is unique in having both an estate tax and an inheritance tax.

If you live in a low-exemption state, planning is important even if your federal tax exposure is zero. Strategies include lifetime gifting, irrevocable trusts, or — for some — relocating to a state without an estate or inheritance tax.

• Irrevocable Life Insurance Trust (ILIT): Keeps life insurance proceeds out of the taxable estate

• Spousal Lifetime Access Trust (SLAT): Transfers assets out of the estate while retaining some access through a spouse

• Grantor Retained Annuity Trust (GRAT): Transfers appreciation to heirs with minimal gift tax exposure

• Charitable Remainder Trust (CRT): Provides income during life, reduces estate, benefits charity

• Annual gifting program: Systematic use of the annual exclusion to reduce estate size over time

For most families, federal estate tax is not a planning priority — the exemption is generous enough that it simply won't apply. But state estate taxes, particularly in states with low thresholds, deserve real attention. And for larger estates, the potential sunsetting of the elevated federal exemption makes 2026 an important planning year.

The best estate tax plan starts with an accurate picture of your estate's value, an understanding of your state's rules, and a conversation with an estate planning attorney and a CPA working together.

💡 Tax law changes frequently. The information here reflects 2026 figures where known, but exemptions and rates are subject to legislative change. Please consult a qualified tax or estate planning professional for current guidance specific to your situation.