Estate Tax Planning 2026: Federal Exemption, Trusts & Wealth Transfer Strategies
Complete estate tax planning guide for 2026. Learn the $13.61M federal exemption, step-up in basis, generation-skipping trusts, and wealth transfer strategies for American investors.
Estate Tax Basics
The federal estate tax is a tax on the transfer of wealth at death. It applies to the total value of everything you own - investments, real estate, business interests, life insurance proceeds, and personal property - above a generous exemption amount.
For most Americans, the estate tax never applies. The current exemption is so high that fewer than 0.1% of estates owe any federal estate tax. However, for wealthy families, proper planning can save millions in taxes.
What's Included in Your Taxable Estate
| Asset Type | Included? | Notes |
|---|---|---|
| Real estate (owned) | Yes | Fair market value at death |
| Bank accounts | Yes | Full balance |
| Investment accounts | Yes | Fair market value |
| Retirement accounts (IRA, 401k) | Yes | Full value (also income taxable to beneficiary) |
| Life insurance you own | Yes | Full death benefit |
| Business interests | Yes | Appraised value |
| Personal property | Yes | Cars, jewelry, art, collections |
| Assets in revocable trust | Yes | You still control them |
Current Federal Estate Tax Rate
For amounts above the exemption:
| Taxable Amount | Tax Rate |
|---|---|
| $0 - $10,000 | 18% |
| $10,001 - $20,000 | 20% |
| $20,001 - $40,000 | 22% |
| $40,001 - $60,000 | 24% |
| $60,001 - $80,000 | 26% |
| $80,001 - $100,000 | 28% |
| $100,001 - $150,000 | 30% |
| $150,001 - $250,000 | 32% |
| $250,001 - $500,000 | 34% |
| $500,001 - $750,000 | 37% |
| $750,001 - $1,000,000 | 39% |
| Over $1,000,000 | 40% |
In practice, most taxable estates pay at or near the top 40% rate because the graduated rates only apply to the first $1M above the exemption.
2026 Federal Estate Tax Exemption
The federal estate tax exemption for 2026 is $13.61 million per person. For married couples using portability, the combined exemption is $27.22 million.
Key Numbers for 2026
| Item | 2026 Amount | Notes |
|---|---|---|
| Individual exemption | $13.61 million | Per person |
| Married couple (portability) | $27.22 million | With proper planning |
| Annual gift exclusion | $18,000 | Per recipient, per year |
| GST exemption | $13.61 million | Same as estate exemption |
| Top tax rate | 40% | On amounts over exemption |
The 2026 Sunset Warning
Critical planning point: Under current law, the estate tax exemption is scheduled to be cut roughly in half on January 1, 2026 (unless Congress acts). This means the exemption could drop to approximately $7 million per person.
| Scenario | Exemption | Couple Exemption |
|---|---|---|
| Current (2024-2025) | $13.61M | $27.22M |
| After sunset (if not extended) | ~$7M | ~$14M |
| Estate at risk if sunset occurs | $7-13M range | $14-27M range |
Families with estates in the $10-30 million range should consider making gifts before any potential exemption reduction. "Use it or lose it" is the mantra among estate planners.
Portability for Married Couples
When the first spouse dies, their unused exemption can transfer to the surviving spouse. This is called portability.
Example:
| Event | First Spouse | Surviving Spouse |
|---|---|---|
| Individual exemption | $13.61M | $13.61M |
| First spouse dies with $3M estate | Uses $3M | - |
| Unused exemption (DSUE) | $10.61M | Receives $10.61M |
| Surviving spouse total exemption | - | $24.22M |
Important: To preserve portability, you must file Form 706 (estate tax return) when the first spouse dies, even if no tax is owed.
Step-Up in Basis at Death
One of the most valuable features of the current tax code: when you die, your heirs receive assets with a "stepped-up" cost basis equal to the fair market value at death. All the gains accumulated during your lifetime are never taxed.
How Step-Up Works
| Scenario | Your Purchase | Value at Death | Gain During Life | Heir's Basis | Capital Gains Tax |
|---|---|---|---|---|---|
| Stock held 30 years | $100,000 | $1,000,000 | $900,000 | $1,000,000 | $0 |
| Real estate | $200,000 | $2,000,000 | $1,800,000 | $2,000,000 | $0 |
| Collectibles | $50,000 | $500,000 | $450,000 | $500,000 | $0 |
Planning Implications
- Hold appreciated assets until death: The step-up eliminates lifetime gains
- Sell losing assets before death: Losses also step-up, eliminating deduction potential
- Don't give highly appreciated assets: Gifts carry over your basis; bequests get step-up
- Consider holding vs selling: Sometimes the step-up is worth more than diversification
Step-Up vs Gift Comparison
| Strategy | Basis | Tax on Sale | Better For |
|---|---|---|---|
| Gift during life | Carryover (your original) | Full gain taxed | Assets with low appreciation |
| Bequest at death | Stepped-up to FMV | No gain | Highly appreciated assets |
Trusts for Estate Planning
Trusts are legal entities that hold assets for the benefit of others. They're essential tools for estate planning.
Common Types of Trusts
| Trust Type | Purpose | Estate Tax Impact |
|---|---|---|
| Revocable Living Trust | Avoid probate, maintain control | None - assets still in estate |
| Irrevocable Life Insurance Trust (ILIT) | Remove life insurance from estate | Excludes policy from estate |
| Grantor Retained Annuity Trust (GRAT) | Transfer appreciation tax-free | Can freeze asset values |
| Qualified Personal Residence Trust (QPRT) | Transfer home at discount | Removes home from estate |
| Charitable Remainder Trust (CRT) | Income + charitable giving | Reduces estate, income tax deduction |
| Dynasty Trust | Multi-generational wealth transfer | Avoids estate tax for generations |
| Spousal Lifetime Access Trust (SLAT) | Gift to spouse's trust | Uses exemption, maintains access |
Irrevocable Life Insurance Trust (ILIT)
Life insurance you own is included in your estate. For large policies, this can trigger estate tax. An ILIT removes the policy from your estate.
Example:
| Scenario | Estate Value | Life Insurance | Total | Estate Tax (40%) |
|---|---|---|---|---|
| No ILIT | $15M | $5M | $20M | $2.56M |
| With ILIT | $15M | $0 (in trust) | $15M | $556K |
| Savings | - | - | - | $2M |
Grantor Retained Annuity Trust (GRAT)
A GRAT lets you transfer appreciation above a hurdle rate (Section 7520 rate) to heirs tax-free.
- Transfer assets to GRAT
- Receive annuity payments back over term
- Appreciation above IRS rate passes to heirs tax-free
- If assets don't appreciate, no gift tax used
Generation-Skipping Transfer Tax
The Generation-Skipping Transfer (GST) tax prevents wealthy families from avoiding estate tax by skipping generations (leaving assets directly to grandchildren).
GST Basics
| Item | Details |
|---|---|
| GST exemption | $13.61 million (same as estate) |
| GST tax rate | 40% (on top of estate tax) |
| Who's a "skip person" | Grandchildren, great-grandchildren |
| Triggers | Direct transfers, trust distributions |
Dynasty Trusts
Some states (Nevada, South Dakota, Delaware) allow perpetual trusts. Combined with the GST exemption, you can create a trust that benefits many generations without estate tax at each generation.
Example: $10 million dynasty trust
| Generation | Trust Value (5% growth) | Estate Tax Avoided (40%) |
|---|---|---|
| Children (30 years) | $43.2M | $17.3M |
| Grandchildren (60 years) | $186.8M | $74.7M |
| Great-grandchildren (90 years) | $807.8M | $323.1M |
Wealth Transfer Strategies
Annual Gift Exclusion
You can give $18,000 per recipient per year without using any lifetime exemption. For a married couple with three children and six grandchildren:
| Recipient | From Each Spouse | Total/Year |
|---|---|---|
| 3 children | $18,000 x 2 | $108,000 |
| 6 grandchildren | $18,000 x 2 | $216,000 |
| 3 children's spouses | $18,000 x 2 | $108,000 |
| Annual total | - | $432,000 |
Over 20 years, that's $8.64 million transferred without using any lifetime exemption.
Direct Payment of Education and Medical Expenses
Payments made directly to educational institutions or medical providers are not considered gifts at all. This is unlimited and doesn't count against annual or lifetime limits.
Family Limited Partnerships (FLPs)
FLPs allow you to gift interests in a family entity at discounted values:
- Transfer assets to FLP
- Gift limited partner interests to heirs
- Interests are discounted for lack of control and marketability (typically 25-40%)
- More value transfers with same gift/estate tax exemption
Spousal Lifetime Access Trust (SLAT)
Use your exemption now while maintaining indirect access to assets:
- Create irrevocable trust for spouse's benefit
- Fund with up to $13.61M
- Spouse can receive distributions
- Assets removed from both estates
Warning: Reciprocal trust doctrine - spouses shouldn't create mirror SLATs.
State Estate Taxes
Many states have their own estate or inheritance taxes with lower exemptions than the federal level.
States With Estate Tax
| State | Exemption | Top Rate |
|---|---|---|
| Connecticut | $13.61M (matches federal) | 12% |
| Hawaii | $5.49M | 20% |
| Illinois | $4M | 16% |
| Maine | $6.8M | 12% |
| Maryland | $5M | 16% |
| Massachusetts | $2M | 16% |
| Minnesota | $3M | 16% |
| New York | $6.94M | 16% |
| Oregon | $1M | 16% |
| Rhode Island | $1.77M | 16% |
| Vermont | $5M | 16% |
| Washington | $2.19M | 20% |
| District of Columbia | $4.71M | 16% |
States With Inheritance Tax
Inheritance tax is paid by the recipient, not the estate. Rates often depend on relationship:
| State | Spouse Rate | Children Rate | Others |
|---|---|---|---|
| Iowa | 0% | 0% | 2-6% |
| Kentucky | 0% | 0% | 4-16% |
| Maryland | 0% | 0% | 10% |
| Nebraska | 0% | 1% | 13-18% |
| New Jersey | 0% | 0% | 11-16% |
| Pennsylvania | 0% | 4.5% | 12-15% |
Estate Planning Action Steps
For Everyone
- Create basic documents: Will, power of attorney, healthcare directive
- Review beneficiary designations: IRA, 401(k), life insurance - these pass outside your will
- Consider revocable trust: Avoids probate, provides privacy
- Document asset locations: Make it easy for heirs to find everything
For Estates $5-15 Million
- Monitor exemption changes: 2026 sunset could affect you
- Consider making gifts now: Use current high exemption
- File Form 706 on first spouse's death: Preserve portability
- Review state estate tax: May apply even if federal doesn't
- Consider ILIT for life insurance: Remove from estate
For Estates Over $15 Million
- Work with estate planning attorney: Complex strategies require expertise
- Consider SLATs: Use exemption while maintaining access
- Explore GRATs: Transfer appreciation tax-free
- Review dynasty trust options: Multi-generational planning
- Annual gifting program: Transfer $18K per recipient yearly
- Direct education/medical payments: Unlimited transfers
- Consider residence state: Move before death to avoid state tax
Professional Team
Estate planning requires a team:
| Professional | Role | When Needed |
|---|---|---|
| Estate planning attorney | Draft documents, trust creation | Everyone |
| CPA | Tax planning, return preparation | Most people |
| Financial advisor | Investment, insurance coordination | Most people |
| Insurance specialist | Life insurance, ILIT funding | Larger estates |
| Trust company | Serve as trustee, administer trusts | Complex situations |
Estate planning isn't just for the wealthy. Everyone needs basic documents. But for those with assets above state exemption thresholds, proper planning can save families hundreds of thousands or millions in taxes. The current high federal exemption is a unique opportunity - but it may not last. Act now.
This is educational content, not legal or tax advice. Estate planning involves complex legal and tax considerations that vary by state and individual circumstances. Work with qualified professionals for your specific situation.
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