Federal Estate Tax: The $13.9M Exemption
The 2026 federal estate tax exemption is $13.9 million per person, indexed annually for inflation. A married couple with proper planning has a combined $27.8 million exemption (using both spouses' allocations through portability or an A/B trust structure).
Above the exemption, the federal estate tax is a flat 40%. So a $20M estate of a single person owes 40% × ($20M - $13.9M) = $2.44M in federal estate tax. The exemption is dollar-for-dollar — the first $13.9M is free, every dollar above is taxed.
Sunset provision: the exemption was doubled by the 2017 Tax Cuts and Jobs Act and is scheduled to revert to roughly half ($7M, indexed) after 2025. Recent legislation extended the doubled exemption through 2026, but long-term direction is uncertain. Estates between $7M and $14M face a 'use it or lose it' decision: gift now (locking in current exemption) or risk losing the exemption later.
Lifetime gift exemption: the $13.9M is unified between estate and gift tax. You can use it during life (gifting) or at death (estate). Strategic gifting during life removes assets and future appreciation from the estate. The IRS issued anti-clawback regulations confirming that exemption used at current high levels won't be clawed back if the exemption decreases later — making current gifting safe even if exemption drops.
Annual Gift Tax Exclusion
Beyond the lifetime exemption, the annual gift tax exclusion in 2026 is $19,000 per donor per recipient ($38,000 per married couple per recipient). Gifts within this annual limit don't count against the lifetime exemption.
Strategic use: a married couple with 3 children can gift $19,000 × 2 × 3 = $114,000 per year that doesn't reduce the lifetime exemption. Add 3 grandchildren and it's $228,000/year. Across 20 years, that's $4.56 million removed from the estate without using lifetime exemption.
529 plan superfund: 5-year acceleration of annual exclusion to fund 529 plans. A married couple can contribute up to $190,000 ($38K × 5) per beneficiary to a 529 in one year, treating it as 5 years of annual exclusions. With 3 grandchildren, that's $570K removed from the estate in one year.
Direct payment of medical and educational expenses: payments made DIRECTLY to medical providers or educational institutions on behalf of someone else are NOT subject to gift tax (no annual exclusion needed). Pay grandkids' tuition or medical bills directly to the school/provider — unlimited amounts, no gift tax.
Spousal gifts: gifts between U.S. citizen spouses are unlimited (no gift tax). Gifts to a non-citizen spouse are limited to $190,000/year in 2026 (vs unlimited for citizen spouses). This catches international couples by surprise.
State Estate and Inheritance Taxes
Twelve states impose their own estate or inheritance taxes in 2026. Estate tax is paid by the estate before distribution; inheritance tax is paid by the recipients (different mechanic but similar effect).
States with estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia. State exemption thresholds range from $1M (Massachusetts and Oregon) to $13M (NY at federal-aligned).
States with inheritance tax (paid by heirs): Iowa, Kentucky, Maryland (also has estate tax), Nebraska, New Jersey, Pennsylvania. Rates vary, often higher for non-relatives.
Massachusetts is unique: the state exemption is $2 million (2024+), and the tax applies to the ENTIRE estate value (not just the amount above $2M) once you cross the threshold. So a $2.1M estate pays Massachusetts estate tax on the full $2.1M, not just the $100K above. This 'cliff' effect creates planning urgency for MA residents with estates near $2M.
Multi-state planning: domicile determines which state imposes estate tax (with some exceptions for real property in other states). Establishing residency in Florida, Texas, or another non-estate-tax state is a common high-net-worth estate planning move.
Gifting Strategies for the Wealthy
Direct gifts of appreciating assets: gift assets that will appreciate (growth stocks, real estate, business interests) so future appreciation occurs in the recipient's hands, outside the donor's estate. The gift uses exemption based on current value; future growth is the recipient's.
Grantor Retained Annuity Trusts (GRATs): a sophisticated technique where you transfer assets to a trust that pays you back the original value plus interest over a term (typically 2-10 years). Excess appreciation passes to beneficiaries with little or no gift tax. Particularly valuable in low-interest-rate environments.
Spousal Lifetime Access Trust (SLAT): a trust funded by one spouse for the benefit of the other (and descendants). The transferring spouse uses gift tax exemption but the receiving spouse can access the trust assets — so the family hasn't really 'lost' access while removing assets from the estate.
Charitable Remainder Trust (CRT): donate appreciated assets to a CRT, receive income for a term of years, with the remainder going to charity. Immediate charitable deduction, no capital gains on the donation, income stream during life. Good for those with concentrated stock positions and charitable intent.
Family Limited Partnerships (FLPs): create an FLP, transfer assets in exchange for limited partnership interests, gift the limited partnership interests to family members (with valuation discounts for lack of control and lack of marketability). Aggressive structures face IRS scrutiny but properly structured FLPs are still effective.
Step-Up in Basis at Death
Assets owned at death receive a 'step-up in basis' to fair market value on the date of death. This eliminates all unrealized capital gains forever — your heirs inherit the assets with the new higher basis.
Concrete example: you bought a house in 1990 for $200K, worth $1.2M at your death. If you sold during life, you'd owe capital gains on $1M of appreciation. Your heirs inherit at $1.2M basis — selling immediately incurs $0 capital gains.
Strategic implication: hold appreciated assets until death rather than selling and paying capital gains. The 'never sell' strategy works especially well for high-basis-real-estate, founder stock, and other significantly appreciated assets.
Conflict with gift planning: if you gift appreciated assets during life, the recipient takes your original basis (carryover basis), not stepped-up basis. So gifting appreciated assets gives the recipient your tax liability. Holding until death gives them clean stepped-up basis and zero capital gains.
Strategic balance: gift assets that will appreciate in the future (growth assets, with low current basis), but hold currently appreciated assets until death (high-basis appreciation). This optimizes both the estate planning and the income tax implications.
Trust Structures
Revocable Living Trust: standard estate planning tool. Avoids probate, provides privacy, allows for incapacity planning. Doesn't reduce estate tax (assets are still in your taxable estate). Best for: any homeowner, anyone with significant assets, anyone wanting to avoid probate.
Irrevocable Life Insurance Trust (ILIT): a trust that owns life insurance on your life, removing the death benefit from your taxable estate. You contribute cash to the ILIT, the trust buys insurance, and at death the proceeds pass to beneficiaries without estate tax. Worth doing if your estate is above the federal exemption.
Generation-Skipping Transfer Tax (GST): an additional 40% tax on transfers to grandchildren or younger generations. The GST exemption ($13.9M in 2026, same as estate tax) can be allocated strategically to multi-generational trusts that benefit your children, grandchildren, and beyond — preserving family wealth across generations.
Special Needs Trusts: protect beneficiaries with disabilities while preserving their eligibility for government benefits like SSI and Medicaid. Important for any family with a disabled member who may need long-term care.
Charitable Lead Trust (CLT): the inverse of a CRT — pays income to charity for a term, with the remainder going to your heirs. Used for high-income earners wanting current charitable deduction while preserving family wealth long-term.