Project your federal estate tax liability using the projected $15M exemption and 40% tax rate. This calculator incorporates the unified credit system and accounts for lifetime gifts[citation:2][citation:8].
The federal estate tax employs a unified credit system that combines gift and estate taxation. The tax is calculated on the taxable estate, which is the portion of your estate exceeding the applicable exemption amount[citation:2][citation:8].
The precise calculation follows these steps:
Key Components:
The estate tax exemption has increased significantly over the past decade due to inflation indexing and the Tax Cuts and Jobs Act provisions[citation:2]:
However, these historically high exemptions are scheduled to sunset after 2025, potentially reverting to approximately $7 million (adjusted for inflation) unless Congress acts[citation:3]. This creates a "use it or lose it" planning opportunity for high-net-worth individuals.
Understanding how estate tax applies in different situations helps with effective planning. Below are common scenarios based on actual estate compositions[citation:3][citation:9].
Scenario: 65-year-old entrepreneur with $22M estate including $12M business interest, $6M real estate, $3M investments, $1M personal assets.
2026 Tax Calculation:
Key Takeaway: Business interests may qualify for valuation discounts (20-40%), further reducing taxable value[citation:3].
Scenario: Single individual with $18M estate: $10M primary residence, $5M investment properties, $2M securities, $1M other assets.
2026 Tax Calculation:
Planning Opportunity: A Qualified Personal Residence Trust (QPRT) could reduce the taxable value of the primary residence by 30-50%[citation:3].
Scenario: Second marriage with children from first marriage. $25M estate with $2M lifetime gifts already made.
2026 Tax Calculation (Married, no portability):
Solution: Credit Shelter Trust could preserve both spouses' exemptions, reducing tax to $1,200,000[citation:3].
For estates exceeding exemption thresholds, several sophisticated strategies can significantly reduce or eliminate tax liability:
Utilize the 2026 annual gift tax exclusion of $19,000 per recipient ($38,000 for married couples). Direct payments of medical and educational expenses are unlimited[citation:2]. Making gifts before the potential 2026 exemption sunset allows you to use the higher exemption amounts before they possibly decrease.
Assets left to qualified charities are fully deductible from the gross estate. Advanced strategies include:
Properly structured trusts can remove assets from your taxable estate while maintaining control:
Estate planning intersects with multiple financial areas. Use these complementary calculators for comprehensive wealth management:
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Retirement Corpus CalculatorDetermine retirement savings needed for estate preservation goals.
Capital Gains AnalyzerCalculate stepped-up basis advantages for inherited assets.
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Under current law, the estate tax exemption is projected to decrease to approximately $7 million (adjusted for inflation) after 2025 unless Congress extends the higher exemptions[citation:3]. The IRS has implemented anti-clawback rules, meaning gifts made using the higher 2025-2026 exemptions will be protected even if exemptions decrease later. This creates a strategic window for making large gifts before 2026.
Yes, retirement accounts are included at their full fair market value in your gross estate[citation:6]. This can create significant tax implications since these accounts are also subject to income tax when distributed to beneficiaries. Strategies like Roth conversions (paying income tax now to remove future growth from your estate) or naming charitable beneficiaries for tax-deferred accounts can optimize both estate and income tax outcomes.
Twelve states and Washington D.C. impose separate estate taxes with exemptions much lower than federal levels[citation:3]. For example, Oregon's exemption is only $1 million, Massachusetts' is $2 million (not indexed for inflation), and even high-exemption states like Connecticut match the federal exemption but impose their own tax calculation. Most state exemptions are not portable between spouses, making planning more complex for married couples in these states.
Portability allows a surviving spouse to use their deceased spouse's unused estate tax exemption (DSUEA - Deceased Spousal Unused Exclusion Amount). To elect portability, the executor must file Form 706 within nine months of the first spouse's death (extensions available). This effectively doubles the exemption for married couples to $30 million in 2026. However, portability doesn't apply to generation-skipping transfer tax exemptions, and state estate tax exemptions are generally not portable[citation:3][citation:8].
Life insurance proceeds are included in your estate if you own the policy or possess "incidents of ownership" at death. This includes the right to change beneficiaries, borrow against cash value, or surrender the policy[citation:3]. To avoid this inclusion, policies can be owned by an irrevocable life insurance trust (ILIT) or by adult children. Transfers to an ILIT must occur at least three years before death to be excluded from your estate.
The GST tax imposes an additional 40% tax on transfers to grandchildren or unrelated individuals who are 37.5+ years younger than the donor. This prevents families from avoiding estate taxes by skipping a generation. The GST exemption mirrors the estate tax exemption ($15M in 2026) but, unlike estate tax exemptions, GST exemptions are not portable between spouses. Trusts can be structured with GST exemption allocation to minimize this tax[citation:3].
Yes, strategic gifting is a fundamental estate tax reduction technique. In 2026, you can give $19,000 per recipient annually ($38,000 for married couples) without using your lifetime exemption or filing gift tax returns[citation:2]. Direct payments of medical and educational expenses are unlimited. Larger gifts use your lifetime exemption but can effectively freeze estate value if given as appreciating assets. The unified credit system ensures gifts and estate transfers are taxed consistently.