Understanding Federal Estate Taxes

1. Federal Exemption in 2026

The federal estate tax exemption for 2026 is $13.61 million for single individuals and $27.22 million for married couples filing jointly. This exemption is adjusted annually for inflation. However, the Tax Cuts and Jobs Act of 2017 doubled these exemptions, and they are scheduled to sunset on December 31, 2025, reverting to approximately $7 million per person (adjusted for inflation) unless Congress extends the current law.

Because of this scheduled sunset, many taxpayers with substantial estates are considering advanced planning strategies before exemption levels decline. If your estate is close to the current exemption, changes in law could significantly impact your tax liability.

2. Portability for Married Couples

Portability is a valuable benefit that allows a surviving spouse to use any unused portion of a deceased spouse's federal estate tax exemption. Without portability planning, an unused exemption is permanently lost. To preserve portability, the executor of a deceased spouse's estate must file a timely federal estate tax return (Form 706) and make an election, even if the estate is not otherwise required to file. The surviving spouse can then apply both exemptions to protect a larger combined estate from federal taxation.

To take advantage of portability, proper planning and documentation are essential. Work with an estate planning professional to ensure your estate plan preserves this valuable benefit.

3. State Estate Taxes

The federal exemption does not protect your estate from state-level taxes. Several states impose estate taxes or inheritance taxes with significantly lower thresholds than the federal exemption. Some states tax estates as small as $1 million or less. Washington state, for example, has a state estate tax with a $2.193 million exemption in 2026. Massachusetts and other states impose their own taxes regardless of federal liability.

Additionally, some states impose inheritance taxes, which are paid by beneficiaries rather than the estate. These state taxes can significantly reduce what heirs receive. If you live in or own property in a state with estate or inheritance taxes, include those liabilities in your planning.

4. Estate Planning Strategies

Several strategies can reduce or eliminate federal estate tax liability. Irrevocable life insurance trusts (ILITs) remove life insurance proceeds from your taxable estate, potentially saving significant taxes. Qualified personal residence trusts (QPRTs) allow you to pass your home or vacation property to heirs at reduced tax cost while retaining the right to live there during the trust term.

Annual gifting is another effective tool. You can give up to $18,000 per recipient per year (in 2026) without any tax consequences, effectively removing assets from your taxable estate. Charitable remainder trusts (CRTs) allow you to benefit from appreciated assets during your lifetime while providing a charitable deduction that reduces your taxable estate. Spousal lifetime access trusts (SLATs) and other sophisticated strategies may be appropriate depending on your situation.

Dynasty trusts, when permitted by state law, allow you to pass wealth to multiple generations while minimizing estate taxes. Discounting strategies for family partnerships and limited liability companies can also reduce valuations for tax purposes. The key is to implement these strategies in advance, as many require significant planning and documentation.