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Will My Beneficiaries Have to Pay the Estate Tax?
The estate tax, more ominously known as the death tax, is a federal tax that is due when a deceased person’s estate exceeds a certain monetary threshold. The federal estate tax is brutal, since an estate that is subject to the estate tax will owe roughly 40% to the federal government. However, most estates are thankfully not subject to the estate tax due to the high exemption amounts.
The current estate tax threshold amount is $13.99 million per person (or $27.98 million for a couple). That means if a deceased person’s estate is below the $13.99 million threshold (also known as the estate tax exemption), then the estate will not owe any federal estate taxes.
The most recent One Big Beautiful Act that was just passed will permanently increase the federal estate tax exemption to $15 million per person (or $30 million per couple) starting on January 1, 2026. The federal estate tax exemption amount changes year to year since it’s indexed for inflation. It can also significantly increase or decrease depending on the political climate and the president who is in office. The estate tax is highly politicized and can quickly change.
The estate tax can also be due at both the state and federal levels. Some states have their own estate or inheritance tax. Currently, twelve states have an estate tax, and six have an inheritance tax. Maryland is the only state that has both an estate tax and an inheritance tax.
Roughly .2% of estates are affected by the federal estate tax due to such high exemption amounts. The reality is that it is not a concern for most estates. However, it’s essential to understand how the federal estate tax works just in case the high exemption amounts ever change in the future.
Which Assets Does the Estate Tax Apply To?
The federal estate tax applies to all of someone’s assets at the time of death: real estate, cash, jewelry, vehicles, annuities, businesses, stocks, etc. The sum of these assets is called the gross estate. Assets include all assets, regardless of whether they are owned in a foreign country. If the gross estate exceeds the federal estate exemption amount of $13.99 million, then a federal estate tax will be owed.
Example: Delores died with a homestead in Florida, a vacation home in France, various bank accounts and investment accounts, and a very nice car collection located in Florida.
Result: All of Delores’ assets will be included in her gross estate, including the vacation home in France and the car collection.
How Assets Are Valued for the Estate Tax
Assets for the estate tax are valued at the time of death. Valuation is challenging because some assets are more difficult to value than others. For example, a family-owned business that is not publicly traded is going to be much harder than a publicly traded company. Why? Because a publicly traded company will be valued based on its stock price on the date the decedent died. A family-owned business will need a formal appraisal done by a licensed appraiser to determine its value.
Real estate, like a family-owned business, will need a date of death valuation to determine the value of the real estate at the time the decedent died. Financial investment accounts are easy to decide on since the value is whatever the value was at the time the decedent died.
Valuation can also be tricky since an estate can choose an alternate valuation date. The alternate valuation date allows the estate to value the estate’s assets six months after the decedent died. This will enable estates to potentially lower the value of the estate and lower any potential estate taxes if the valuation of an asset significantly declines six months after someone dies.
Example: John died owning $17 million worth of commercial properties in the state of Florida. The value of the commercial properties would put John over the estate tax limit of $13.99, so his estate would owe estate taxes. However, four months after John’s death, the commercial real estate market in Florida took a significant hit due to rising interest rates and insurance costs. John’s estate decided to choose the six-month alternate valuation option, which would bring down the value of John’s estate to $12 million.
Result: By choosing the six-month alternate valuation option, John’s estate would not owe any estate taxes since the value of John’s estate would be $12 million, which would put him below the estate tax threshold of $13.99 million.
Once you pick the alternate valuation, you cannot select which assets are subject to the alternate valuation. All assets must be valued six months after the decedent’s death if you make the election. The election must be made within one year of someone’s death. And the election can only be made if it decreases the value of the estate.
How Much is the Federal Estate Tax?
The federal estate tax generally is 40% of the value of the estate that exceeds the estate tax threshold of $15 million (2026). The federal estate tax is progressive, so the amount owed on estates that exceed the federal estate tax threshold of $1 million will range from 18 to 39%. Any amount that exceeds $1 million will be taxed at 40%.
Example: Delilah dies with an estate worth $17 million. Delilah’s estate exceeds the federal estate tax exemption amount by $2 million ($17 million minus $15 million). That means her estate will owe an estate tax on $2 million.
Result: The first million subject to the estate tax will be taxed based on a tax rate that varies from 18 to 39%. The second million will be subject to the flat 40% estate tax. Delilah’s estate would owe the IRS $745,800.
How the Federal Estate Tax Works for Married Couples
Married couples have a huge advantage over single individuals: they can combine the federal estate tax exemption amounts of $15 million per person. This happens because the surviving spouse can receive the deceased spouse’s exemption amount through something we call portability. Portability allows the transfer of the deceased spouse’s unused exclusion amount to the surviving spouse (also known as the DSUE exclusion).
The transfer of the deceased spouse’s federal estate tax exemption amount allows the surviving spouse to double their federal estate tax exemption. The surviving spouse can thus exempt $30 million, meaning that if the surviving spouse dies with less than $30 million, the estate will likely not owe any taxes.
Note: The DSUE exclusion is not automatically transferred to the surviving spouse. DSUE exclusion must be applied for by filing an estate tax return after a spouse dies.
How to Avoid the Federal Estate Tax
Several strategic estate planning techniques can be used to avoid the federal estate tax. The most common methods involve the use of irrevocable trusts. Dozens of irrevocable trusts are used for estate tax planning: Grantor Retainer Annuity Trusts (GRATs), Charitable Lead Trusts (CLTs), Spousal Lifetime Access Trusts (SLATs), Qualified Personal Residence Trusts (QPRTs), etc.
Irrevocable trust planning depends entirely on someone’s estate tax planning goals. Some people want to provide a significant amount for charities after death. Some people want to provide for their loved ones and family members. A good estate planner will mix and match different irrevocable trusts depending on the client’s goals and objectives.
Another very common planning technique involves the use of family limited partnerships (FLPs) or family-owned limited liability companies (FLLCs). These FLPs or FLLCs can own a variety of assets: investments, business interests, properties, etc. The main benefit of using FLPs or FLLCs is that they allow for high-level estate tax planning through the use of valuation discounts. Valuation discounts allow for an additional 25 to 35% of estate tax savings through an FLP or FLLC because there are discounts for minority interests (lack of control) and for a lack of marketability.