Estate Tax

The federal estate tax — informally called the death tax — is imposed under Chapter 11 of the Internal Revenue Code on the gross estate of a deceased U.S. citizen or resident. The gross estate includes essentially all property the decedent owned or had certain interests in at the time of death: real estate, bank and investment accounts, retirement accounts (to the extent includible), life insurance proceeds on policies owned by the decedent, business interests, and tangible personal property.

After computing the gross estate, certain deductions reduce it to arrive at the taxable estate. The marital deduction — an unlimited deduction for property passing to a surviving U.S. citizen spouse — is the most powerful, allowing married couples to defer the estate tax entirely until the surviving spouse's death. Charitable bequests are also fully deductible. Estate administration expenses, debts of the decedent, and losses during estate administration are additional deductions.

For 2025, the basic exclusion amount is $13.99 million per individual. This means an unmarried decedent with a taxable estate below $13.99 million owes no federal estate tax. Married couples can effectively double this amount through portability — the surviving spouse may elect to use any unused portion of the predeceased spouse's exemption by filing Form 706 within nine months (or up to 15 months with an extension) of the first spouse's death.

The TCJA doubled the exemption from the pre-2018 level of approximately $5.5 million. The increased exemption is scheduled to sunset after December 31, 2025, reverting to roughly $7 million (inflation-adjusted) beginning in 2026 unless Congress acts. The IRS has issued regulations confirming that gifts made using the higher exemption before the sunset date will not be subject to additional tax if the exemption decreases — providing a planning window for large taxable gifts made in 2025.

For amounts exceeding the exemption, the estate tax is progressive, with rates starting at 18% on the first $10,000 above the exemption and reaching the top marginal rate of 40% on amounts above $1 million over the exemption. Form 706 (United States Estate Tax Return) is due nine months after the date of death, with a six-month extension available.

A critical planning feature is the step-up in basis: assets included in the decedent's gross estate receive a new income tax basis equal to their fair market value at the date of death. This step-up eliminates the unrealized capital gains embedded in appreciated assets, making estate tax planning and income tax basis planning deeply interrelated.