Estate Tax Planning Basics 2026
Published on June 2026
The $13.61 million estate tax exemption protects most families—but it vanishes on January 1, 2027. Unless Congress acts, the exemption drops to ~$7 million, suddenly exposing estates worth $7M-$13.61M to 40% federal estate tax. That's a $2.6 million tax bill on a $10 million estate that's currently exempt.
The problem? Most wealthy families assume they're safe under the high exemption and ignore estate planning. Then they miss critical opportunities: the step-up in basis that erases capital gains, portability elections that preserve spousal exemptions, annual $18K gifts that remove millions from estates over time, and state estate taxes (12 states with exemptions as low as $1M) that hit even "small" estates.
This guide shows you how to protect your wealth from estate taxes—even if you're "under the exemption." We explain the 2027 sunset cliff ($13.61M → $7M), state estate taxes (MA charges tax on $2M+ estates), portability (preserves $27.22M married exemption), annual gifting strategies ($18K/person = $180K to 10 people), and trusts (ILIT, GRAT, QPRT) for high-net-worth planning.
Estate tax affects only large estates but requires early planning. The 2026 federal exemption of $13.61 million per person means most estates avoid federal tax, but strategic planning still benefits heirs through income tax basis step-up and state tax mitigation.
Federal Estate Tax Exemption
Estates under $13.61 million per person ($27.22 million married) owe no federal estate tax. This exemption sunsets after 2026, potentially dropping to $7 million inflation-adjusted unless Congress extends current law.
State Estate Taxes
Twelve states plus D.C. impose estate taxes with exemptions as low as $1 million. Six states charge inheritance taxes paid by heirs. State residence at death determines taxation, making relocation planning valuable.
Portability Election
Surviving spouses can claim deceased spouse's unused exemption by filing estate tax return (Form 706) even if estate is below filing threshold. This preserves full $27.22 million combined exemption for married couples.
Annual Gifting Strategy
Give up to $18,000 per person annually ($36,000 married) without using lifetime exemption or filing gift tax returns. Strategic gifting to multiple family members removes wealth from taxable estate while supporting heirs.
Trust Structures
Irrevocable trusts remove assets from estate while providing control over distribution timing and terms. Qualified Personal Residence Trusts, Grantor Retained Annuity Trusts, and other structures offer tax benefits for high-net-worth families.
Frequently Asked Questions
What is the federal estate tax exemption for 2026?
The federal estate tax exemption is $13.61 million per person ($27.22 million married) for 2026. Estates below this amount owe no federal estate tax. However, this exemption sunsets December 31, 2026, potentially dropping to ~$7 million inflation-adjusted unless Congress extends it. Top estate tax rate is 40% on assets exceeding the exemption.
Which states have estate or inheritance taxes?
12 states plus D.C. impose estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts ($2M exemption), Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and Washington D.C. 6 states have inheritance taxes (paid by heirs): Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. State residence at death determines taxation.
What is portability and should I elect it?
Portability allows surviving spouses to use deceased spouse's unused estate tax exemption by filing Form 706 within 9 months of death (even if estate is below filing threshold). This preserves the full $27.22 million combined exemption. ALWAYS elect portability—it's free insurance protecting the family's full exemption for surviving spouse's estate.
How much can I gift tax-free annually?
Gift up to $18,000 per recipient annually ($36,000 married, splitting gifts) without using lifetime exemption or filing gift tax returns (Form 709). No limit on number of recipients: Give $18K each to 10 people = $180K removed from estate annually. Strategic gifting to children, grandchildren, and trusts reduces taxable estate while supporting family.
What is the step-up in basis and why does it matter?
Assets inherited receive 'step-up in basis' to fair market value at death, erasing all lifetime capital gains. Example: Stock bought for $10K, worth $1M at death. Heir's basis = $1M (not $10K). If sold immediately, no capital gains tax. This makes dying with appreciated assets tax-efficient. Contrast with lifetime gifts, which carry over donor's low basis.
Should I use irrevocable trusts for estate planning?
Irrevocable trusts remove assets from taxable estate while providing control over distribution. Common types: Irrevocable Life Insurance Trust (ILIT) for life insurance proceeds, Qualified Personal Residence Trust (QPRT) for homes, Grantor Retained Annuity Trust (GRAT) for appreciating assets. Trade-off: You lose direct control. Best for estates exceeding exemption or complex family situations.
What happens to the estate tax exemption after 2026?
Without legislative action, the estate tax exemption sunsets December 31, 2026, reverting to ~$7 million inflation-adjusted (from current $13.61M). This affects estates $7M-$13.61M currently exempt. Strategies: Use 'use it or lose it' gifting before sunset, establish irrevocable trusts, or monitor legislative changes. Congress may extend current levels.
Do I need estate planning if I'm under the exemption?
YES! Estate planning isn't just about taxes. Even if under $13.61M: (1) State estate taxes may apply (MA threshold: $2M), (2) Beneficiary designations and wills avoid probate, (3) Trusts protect assets from creditors and divorcing spouses, (4) Powers of attorney and healthcare directives ensure your wishes, (5) Step-up in basis planning optimizes heirs' taxes.
Conclusion
Estate tax planning protects wealth for future generations even with high exemptions. Implement annual gifting strategies, monitor exemption sunset provisions, and consider trusts and portability elections to minimize estate and state-level taxation.
Use our Tax Calculator to estimate your tax liability and optimize your tax strategy for 2026.