Estate Tax

How federal estate tax works

US estate tax applies only to estates above an exemption threshold:

• 2025 exemption: $13.99 million per individual (about $28M for a married couple combining both exemptions).
• Tax rate above exemption: 40% federal.
• State estate or inheritance taxes apply separately in some states (Massachusetts, New York, Oregon, others), often with much lower thresholds.

Because the federal exemption is so high, federal estate tax affects only a small percentage of US estates — roughly the wealthiest 0.1% of decedents. For typical households, federal estate tax isn't a planning factor.

What's included in the estate

The taxable estate is broader than people often expect:

• Cash, investments, real estate, business interests, retirement accounts.
• Life insurance proceeds — included unless specifically excluded by ownership structure (irrevocable life insurance trust).
• Gifts above the annual exclusion ($19,000 per recipient in 2025) reduce the lifetime exemption.
• Closely held business interests — often the largest estate component for business owners.
• Real property in any jurisdiction — even non-US assets are included for US persons.

Step-up in basis

A separate but related rule: when someone inherits an asset, the cost basis "steps up" to fair market value at the date of death. This eliminates accumulated capital gains tax on the deceased's lifetime appreciation.

A stock bought for $10K and worth $1M at death:

• If sold during life — $990K of capital gains, taxable to the seller.
• If passed at death — heir's basis becomes $1M; if heir sells immediately, no taxable gain.

This is one of the largest tax breaks in the US tax code. The "Buffett strategy" of holding appreciated assets until death uses it deliberately. It's controversial — described by critics as a major loophole, defended by others as preventing double taxation.

Estate tax planning

For estates approaching or exceeding the exemption:

• Lifetime gifting. Annual exclusion gifts ($19K per recipient in 2025) and use of lifetime exemption during life. Reduces the eventual taxable estate.
• Irrevocable trusts. GRATs (Grantor Retained Annuity Trusts), CLATs, and various other vehicles transfer wealth out of the taxable estate.
• Family limited partnerships. Discount valuations on closely held interests.
• Qualified personal residence trusts. Transfer home equity at discounted gift-tax cost.
• Generation-skipping transfers — pass directly to grandchildren via GST trusts, subject to a separate tax framework.

These structures are complex, require attorneys experienced in estate planning, and have ongoing operational requirements.

State variations

State estate and inheritance taxes vary widely:

• No state estate tax — most US states.
• State estate tax — Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, plus Washington DC. Exemptions and rates vary significantly.
• Inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. Tax falls on the recipient rather than the estate; rates often depend on relationship to the deceased.

A wealthy Massachusetts resident could face significant state estate tax with an estate well below the federal threshold. State residency for estate-tax purposes can be a major planning factor.

The 2026 sunset

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the federal estate tax exemption. That doubling is scheduled to sunset at the end of 2025 (now in the past, with 2025 being the last year at the higher level under the original schedule).

Without legislation to extend it, the federal exemption would drop to roughly $7M per individual starting January 1, 2026. This created significant 2025 planning urgency for wealthy individuals — using the higher exemption while available, often via large lifetime gifts to irrevocable trusts.

Whether legislation extends the higher level, or it actually reverts, has been an active political question.

International perspective

US estate tax is unusually structured by global comparison:

• High exemption, high rate — affecting few estates but at a steep marginal rate.
• Many countries — including most European countries — apply lower rates to broader populations.
• Some countries — Australia, New Zealand, Canada (which has no estate tax but does have a "deemed disposition" at death taxing accumulated gains) — have very different structures.
• Tax havens — some jurisdictions have minimal or no estate tax, attracting estate-planning structures.

For internationally mobile wealthy families, residency and citizenship choices have major estate-tax implications. The interaction of multiple jurisdictions can be complex.

Why most people don't need to think about this

For US households below ~$10M in net worth, federal estate tax simply doesn't apply. For most middle-class estates, basic estate planning — wills, beneficiary designations, possibly a basic trust — covers the practical needs without estate-tax considerations.

Estate-tax planning becomes worthwhile when net worth genuinely approaches the exemption thresholds. Below that, the time and cost of complex structures isn't worth the protection they provide.