Estate Tax Basics: The 2026 Exemption, Portability and Who Actually Pays

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: For 2026 the federal estate tax exemption is $15 million per person, indexed for inflation and made permanent by the 2025 law. Married couples can pass $30 million using portability. Above that, the top rate is 40%. Far more families are exposed to state estate taxes, some of which start at $1 million or $2 million.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The federal estate tax is a tax on the transfer of property at death. It applies only to estates above a large exemption, and the 2025 tax law (OBBBA) set that exemption at $15 million per person for 2026, indexed for inflation afterward, with no scheduled sunset. For most households, including most FIRE households, the federal estate tax will never apply.

But estate planning is still about taxes: state estate taxes, income tax basis at death, and retirement accounts that heirs pay income tax on. This guide covers the federal exemption, portability, state taxes, who pays, and simple planning. Figures are as of October 27, 2026, from the IRS estate tax page. Related: estate planning basics for FIRE, step-up in basis and the tax planning guide.

CPA Warning Label: The federal estate tax now affects a tiny sliver of estates, which has not stopped it from starring in a large share of dinner-party anxiety. The state version is the one that sneaks up on people.

Exemption amount

The exemption is unified with the lifetime gift tax exemption: taxable gifts you make during life (gifts above the annual exclusion) use up part of it. Most people never pay gift tax because large lifetime gifts just reduce the exemption left at death. See gift tax annual exclusion.

Above the exemption, the top estate tax rate is 40%. The estate tax is computed on the gross estate (everything owned at death, including retirement accounts, life insurance owned by the decedent, and a share of jointly held property), minus debts, expenses, and the marital and charitable deductions.

Earlier law had scheduled the exemption to fall by about half in 2026. That cliff is gone, which removed much of the urgency behind the large-gift planning of 2024 and 2025.

Portability

A surviving spouse can use the deceased spouse's unused exclusion amount (DSUE). If the first spouse dies with a $15 million exemption and leaves everything to the surviving spouse (which is tax-free under the unlimited marital deduction), the survivor can add the unused $15 million to their own, for a combined $30 million.

• Portability is not automatic. The executor must file a timely Form 706 estate tax return for the first spouse, even if no tax is owed.
• The IRS allows a simplified late portability election for up to five years after death in many cases, under Rev. Proc. 2022-32.
• The DSUE amount is fixed at the first death; it does not grow with inflation.
• If the survivor remarries and the new spouse also dies first, the DSUE from the first spouse may be lost and replaced with the new spouse's.

Practical tip: file the 706 for portability at the first death if there is any chance the survivor's estate will grow, including from investment growth over a long retirement. It is cheap insurance, though it does extend how long the IRS can review the first spouse's values.

State estate taxes

Many families who will never pay federal estate tax can still owe a state tax. Roughly a dozen states and the District of Columbia have an estate tax, and a handful of states have an inheritance tax paid by heirs. Exemptions vary widely: some states start at $1 million or $2 million, others track the federal amount. Massachusetts and Oregon have long been among the lowest thresholds.

• Most state estate taxes do not have portability, so a couple may need trust planning at the first death to use both exemptions.
• Real estate is taxed by the state where it is located, so a vacation home in another state can create a second estate tax filing.
• Moving in retirement changes your state of domicile and may change the answer entirely.

Check your state revenue department's current rules; state thresholds change frequently.

Who pays

The estate pays the federal estate tax, generally due nine months after death (with a six-month extension available for filing, not paying). The executor pays it from estate assets before distributing to heirs. Inheritance taxes, by contrast, are paid by heirs and often depend on their relationship to the deceased: spouses are usually exempt, children often are, and distant relatives pay the most.

Heirs generally do not pay income tax on what they inherit. However:

• Inherited traditional IRAs and 401(k)s are taxable income to heirs when withdrawn, usually within 10 years for non-spouse beneficiaries.
• Most other assets get a stepped-up basis, wiping out built-in capital gains. See step-up in basis.
• Rental properties also reset depreciation under step-up, which matters for depreciation planning and properties acquired through 1031 exchanges.

Simple planning

For estates well under $15 million, estate planning is mostly about control, simplicity and income tax, not estate tax.

1. Update beneficiary designations on retirement accounts, life insurance and brokerage TOD registrations. They override your will.
2. Write a will, and consider a revocable living trust to avoid probate.
3. Hold appreciated assets until death when practical, to capture the step-up.
4. Spend or convert tax-deferred accounts strategically, because heirs pay income tax on them, possibly in their peak earning years.
5. Give using the annual exclusion ($19,000 per recipient in 2026) if you want to help family now.
6. Check your state's estate tax and whether a credit shelter trust makes sense.
7. File for portability at the first death.

For estates near or above the exemption, techniques like grantor retained annuity trusts, irrevocable life insurance trusts, family limited partnerships and charitable trusts come into play. These are aggressive in different ways and draw IRS scrutiny, especially valuation discounts. Real estate investors with large portfolios should coordinate them with real estate professional status and entity planning.

Myths

• "My kids will pay 40% on everything." Only the value above the exemption is taxed, and only if the estate exceeds it. Below $15 million per person, the federal rate is effectively zero.
• "A living trust saves estate tax." A revocable trust avoids probate but is still part of your taxable estate. Tax savings need irrevocable structures or deductions.
• "Life insurance is always tax-free." The death benefit is generally free of income tax, but it is included in your estate if you own the policy. Large policies are often held in an irrevocable life insurance trust for that reason.
• "Joint ownership solves everything." Jointly owned property passes outside probate, but adding a child to a deed can be a taxable gift, can expose the property to the child's creditors and can cost half the step-up.
• "The exemption will drop again soon." Under current law there is no scheduled sunset. Congress can change it, but planning around guesses tends to age badly.
• "Gifts during life avoid estate tax." Annual exclusion gifts do. Larger gifts use the same lifetime exemption, and gifted assets lose the step-up at death.

The real lesson: for most people, the biggest estate-related taxes are income taxes on inherited retirement accounts and capital gains on assets that were sold instead of held. Those are worth more planning attention than the federal estate tax itself.

Illustration

Pat and Lee, a married couple in a state with a $2 million estate tax exemption and no portability, have $5 million: $2 million in IRAs, a $1.2 million home and $1.8 million in taxable accounts.

• Federal: far below $30 million combined. No federal tax.
• State, simple will leaving everything to the spouse: no tax at the first death, but at the second death $5 million faces state tax on about $3 million above the survivor's exemption.
• With a credit shelter trust at the first death funded with $2 million, both state exemptions are used, and the state tax at the second death falls sharply.

Income tax still matters more for their heirs: the $2 million of IRAs will be taxable to the kids, while the taxable accounts and home get a step-up. A plan that converts some IRA money to Roth during low-income early retirement years may save heirs more than any estate tax trick.

Simplified illustration; state rules and trust design vary.