Estate Tax: Exemptions, Rates & Planning Basics

The federal estate tax applies to the transfer of wealth at death—but thanks to high exemptions, very few Americans pay it. Still, understanding the rules helps with planning, especially if you have significant assets.

Key Takeaways

• The 2025 federal exemption is $13.99 million per person ($27.98 million for couples).
• The top estate tax rate is 40% on amounts above the exemption.
• The exemption is scheduled to drop roughly in half after 2025 unless Congress acts.

Federal Estate Tax Exemption

The estate tax exemption is the amount you can pass to heirs tax-free. It’s been historically high in recent years:

Important: The 2017 Tax Cuts and Jobs Act doubled the exemption, but this expires after 2025. Without new legislation, the exemption will revert to approximately $7 million (indexed for inflation).

How the Estate Tax Works

1. Calculate gross estate: All assets owned at death (home, investments, retirement accounts, life insurance, etc.)
2. Subtract debts and expenses: Mortgages, funeral costs, estate administration
3. Subtract charitable bequests: Gifts to qualified charities
4. Subtract marital deduction: Unlimited amount can pass to a surviving spouse
5. Apply exemption: The remaining estate is reduced by your exemption
6. Pay tax on the rest: At rates up to 40%

Estate Tax Rate Schedule

Taxable Estate Over	Rate
$0	18%
$10,000	20%
$20,000	22%
$40,000	24%
$60,000	26%
$80,000	28%
$100,000	30%
$150,000	32%
$250,000	34%
$500,000	37%
$750,000	39%
$1,000,000+	40%

In practice, the effective rate is 40% on everything above the exemption.

Portability: Using Your Spouse’s Exemption

If one spouse dies without using their full exemption, the surviving spouse can “port” the unused exemption to their own estate.

Example:

• Spouse A dies in 2025 with a $5 million estate (uses $5M of $13.99M exemption)
• Surviving spouse can add the unused $8.99M to their own exemption
• Surviving spouse now has $13.99M + $8.99M = $22.98M exemption

Requirement: File an estate tax return (Form 706) even if no tax is due, to elect portability.

The Stepped-Up Basis

One of the most valuable estate planning rules: inherited assets receive a stepped-up cost basis to fair market value at death. For a detailed walkthrough of how this works, including community property states and planning strategies, see our step-up in basis guide.

Example:

• Parent bought stock for $50,000
• Stock is worth $500,000 at death
• Heir inherits with $500,000 basis
• $450,000 of gain is never taxed

This applies to:

• Stocks and investments
• Real estate
• Business interests
• Collectibles

Exception: Retirement accounts (IRAs, 401ks) don’t get stepped-up basis—distributions are taxable to heirs.

State Estate and Inheritance Taxes

Even if you’re under the federal exemption, your state may have its own tax:

States with Estate Tax (Lower Exemptions)

State	2025 Exemption
Oregon	$1 million
Massachusetts	$2 million
Rhode Island	$1.77 million
New York	$6.94 million
Washington	$2.19 million
Maine	$6.8 million
Connecticut	Matches federal

States with Inheritance Tax

These states tax heirs based on their relationship to the deceased:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Spouses and often children are usually exempt; more distant relatives pay higher rates.

Basic Estate Planning Strategies

1. Annual Gift Exclusion

You can give up to $19,000 per recipient (2025) without using any of your lifetime exemption. For the full breakdown, see gift tax limits explained.

• Married couples can give $38,000 together per recipient
• No limit on number of recipients
• Great for gradually reducing estate size

2. Spousal Transfers

Unlimited transfers between spouses are tax-free. But consider whether concentrating assets creates future estate tax issues.

3. Charitable Giving

Charitable bequests are fully deductible from your taxable estate. Consider:

• Direct bequests
• Charitable remainder trusts
• Donor-advised funds

4. Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are included in your estate if you own the policy. An ILIT removes the policy from your estate.

5. Grantor Retained Annuity Trust (GRAT)

Transfer appreciating assets while retaining annuity payments. If assets grow faster than IRS rates, the excess passes tax-free. Learn more in our GRAT estate planning guide.

See our detailed guide: Grantor Trust Guide

Related Guides

• Gift Tax Limits Explained --- annual exclusion basics
• Charitable Giving Strategies --- reduce estate + income tax
• Grantor Trust Guide --- trust planning
• GRAT Estate Planning Strategy --- advanced transfers

The 2026 Exemption Cliff

The current high exemption expires after December 31, 2025. Without Congressional action:

• Exemption drops to ~$7 million (from ~$14 million)
• Many more estates could be taxable
• Planning now can lock in the higher exemption

Strategy: Consider using your exemption now through gifting or trusts if you have a large estate.

DIY Checklist: Do You Need Estate Planning?

Consider estate planning if:

• Net worth exceeds state estate tax exemption
• Net worth exceeds $7 million (future federal floor)
• You have appreciated assets you want to pass on
• You own a business
• You have minor children
• You have specific wishes for asset distribution

Documents most people need:

• Will — directs asset distribution
• Durable power of attorney — someone to manage finances if incapacitated
• Health care proxy — someone to make medical decisions
• Beneficiary designations — on retirement accounts and life insurance

How sharper.tax Helps

When you upload your tax return to sharper.tax, our platform helps you understand how your current income and assets interact with estate planning strategies. We identify opportunities like charitable bunching that can reduce both your income tax now and your taxable estate later, and flag whether your retirement accounts could benefit from Roth conversion strategies that improve the tax efficiency of wealth transfers. Sophisticated tax planning used to require a high-end CPA --- we make it available for free.

Sources

• IRS Estate and Gift Taxes
• IRS Form 706 (Estate Tax Return)
• IRS Publication 559 (Survivors, Executors, and Administrators)

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The information above is educational and not tax advice.