Inheritance And Estate Tax in United States

What is the 2025 US federal estate tax exemption?

The federal estate tax under IRC §2001 imposes a 40 percent tax on the taxable estate of a decedent in excess of an annually-indexed exemption amount [SC1]. For decedents dying in tax year 2025, the exemption is USD 13.99 million per individual, set by Rev. Proc. 2024-40 [SC2]. The companion gift-tax lifetime exemption is the same USD 13.99 million figure; the two operate as a unified credit under IRC §2010.

Key legislative context: The Tax Cuts and Jobs Act of 2017 doubled the exemption from approximately USD 5.49 million (2017) to USD 11.18 million (2018), with annual inflation indexing. The TCJA exemption was scheduled to sunset on December 31, 2025, reverting the exemption to roughly USD 7 million per individual (inflation-adjusted from the 2017 base). The One Big Beautiful Bill Act enacted in mid-2025 made the elevated TCJA exemption permanent and raised it to USD 15 million for 2026, with annual inflation indexing thereafter. Year-stamp: the rules described reflect post-OBBBA permanent law as of mid-2026; older guidance referencing the 2026 sunset is superseded.

The taxable estate equals the gross estate (all property the decedent owned or had a transferable interest in at death) minus allowable deductions (debts, funeral expenses, administration expenses, charitable bequests, marital deduction for transfers to a US-citizen surviving spouse). Adjustment for prior taxable gifts in excess of annual exclusions reduces the remaining estate-tax exemption.

Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) is the return filed by the executor of an estate. The filing requirement is triggered when the gross estate plus adjusted taxable gifts exceeds the exemption amount, even when the deductions reduce the taxable estate to zero. A surviving spouse can elect portability of the deceased spouse's unused exemption (DSUE) via Form 706, but only if the form is timely filed.

How does portability of the deceased spouse's exemption work?

IRC §2010(c) permits a surviving spouse to use the deceased spouse's unused exclusion amount in addition to their own — known as portability or DSUE [SC1]. The election requires the executor of the deceased spouse's estate to file a timely Form 706 (within nine months of death, with six-month extension available via Form 4768), even if no estate tax is owed, to compute and "port" the DSUE to the surviving spouse.

If the surviving spouse remarries and the new spouse dies, the DSUE inherited from the new spouse replaces (does not stack with) the DSUE from the original first spouse. This is known as the "last DSUE" rule. Lifetime gifts by the surviving spouse use any available DSUE before their own basic exclusion amount.

DSUE provides the practical USD 27.98 million combined exemption (USD 13.99 million × 2) that many sources cite as the "married couple" exemption for 2025. The portability election is the mechanism that delivers it.

Late portability elections are permitted under Rev. Proc. 2022-32 for estates not otherwise required to file Form 706. The IRS will accept a late portability election if filed by the fifth anniversary of the decedent's death and the only reason for filing Form 706 is to elect portability.

How does the federal gift tax interact with the estate tax?

The federal gift tax under IRC §2501 imposes the same 40 percent rate on taxable gifts made during the donor's lifetime in excess of annual exclusions and the lifetime exemption [SC3]. The gift-tax and estate-tax exemptions are unified — they share the same USD 13.99 million (2025) lifetime amount under IRC §2010(c).

Annual exclusion (IRC §2503(b)): The donor may give up to USD 19,000 per donee per year for 2025 without using any lifetime exemption. The annual exclusion is per donee, not per donor — a donor can give USD 19,000 to each of ten different donees in the same year (USD 190,000 total) without using lifetime exemption. A married couple electing to "gift-split" under §2513 can effectively double the per-donee annual exclusion to USD 38,000 by treating gifts made by one spouse as half made by each spouse, even if only one spouse owned the gifted property.

Lifetime exemption: Gifts above the annual exclusion are "taxable gifts" reported on Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). Cumulative taxable gifts reduce the donor's remaining lifetime exemption dollar-for-dollar. No gift tax is owed until cumulative taxable gifts exceed the exemption — at which point the 40 percent rate applies to amounts above the exemption. Lifetime gifts that have used exemption are added back to the gross estate at the donor's death for purposes of computing the remaining estate-tax exemption, so the unified credit operates correctly.

The medical and educational exclusion under IRC §2503(e) allows unlimited tax-free gifts when paid directly to the medical care provider or educational institution on behalf of any individual (no annual cap, no relationship requirement). The payment must go directly to the provider, not to the beneficiary as reimbursement.

Gifts to a US-citizen spouse: Unlimited marital deduction under IRC §2523. Gifts to a non-US-citizen spouse are limited to a special annual exclusion (USD 190,000 for 2025), reflecting Congress's concern that property gifted to a non-citizen spouse might escape US estate tax.

Form 709 is due April 15 of the year following the gift, with extensions following the Form 1040 cycle. Failure to file Form 709 when required does not generally trigger penalties when no tax is owed (because the lifetime exemption absorbs the gift), but it creates a documentation gap that can complicate the estate-tax computation at the donor's later death.

What is the Generation-Skipping Transfer Tax (GSTT)?

The Generation-Skipping Transfer Tax under IRC chapter 13 (§§2601-2664) is a separate 40 percent tax on transfers — by gift or at death — that skip a generation of beneficiaries [SC4]. The classic example: a grandparent giving USD 1 million to a grandchild, bypassing the parent generation. The GSTT was enacted in 1986 to prevent wealthy families from avoiding generations of estate tax via long-term trusts that distributed across multiple generations.

The GSTT exemption is unified with the estate and gift tax exemptions, set at USD 13.99 million for 2025. A donor can allocate exemption to specific transfers via Form 709 (for inter vivos gifts) or Form 706 (for transfers at death) to shield those transfers from GSTT.

GSTT applies to three categories of "generation-skipping transfers":

1. Direct skips: Outright gifts or bequests to a "skip person" (a beneficiary two or more generations below the donor — grandchild, great-grandchild, etc., or any non-relative more than 37.5 years younger than the donor). GSTT applies in addition to the gift or estate tax.
2. Taxable distributions: Distributions from a trust to a skip person where the donor allocated GSTT exemption to the trust at inception. The distributee pays the GSTT.
3. Taxable terminations: Termination of a trust interest of a non-skip person (e.g., death of the donor's child who was the income beneficiary), resulting in the trust property vesting in skip persons. The trustee pays the GSTT.

GSTT exemption allocation is the principal practitioner workpoint. Mistakes — allocating exemption to a trust that holds GSTT-exempt assets, or failing to allocate to a trust that will produce skip distributions — can produce 40 percent tax liability decades later when the donor's exemption is no longer available. Form 709 is the allocation vehicle for inter vivos transfers; Schedule R on Form 706 covers transfers at death.

Step-up basis under IRC §1014

IRC §1014 provides one of the most consequential rules in US estate planning: the basis of property acquired from a decedent is the fair market value of the property on the date of death (or, if elected, the alternate valuation date six months later under IRC §2032) [SC5]. The pre-death basis is extinguished. Built-in capital gain on appreciated property is wiped clean at death.

The rule applies to nearly all property included in the decedent's gross estate, with limited exceptions:

• Income in respect of a decedent (IRD) under IRC §691: Does not get step-up. Items like deferred compensation, qualified plan benefits, accrued interest on US savings bonds, and final unpaid wages retain their pre-death character and are taxed to the recipient as ordinary income when paid.
• Property gifted within one year of death under IRC §1014(e): If the decedent received the property by gift within one year of death and the property passes back to the donor (or donor's spouse), the step-up is disallowed. Anti-gaming rule.
• Section 199A pass-through interests, partnership interests with hot assets, and certain trusts: Complex; step-up applies to the outside basis of a partnership interest but inside-basis step-up requires a §754 election by the partnership.

The step-up rule interacts with the unlimited marital deduction in a way that produces a planning rule of thumb: hold appreciated property until death rather than gift it during life. Gifted property carries the donor's basis (carryover basis under IRC §1015), so the recipient inherits the embedded capital gain. Property held until death gets step-up, extinguishing the capital gain. The tradeoff is the estate-tax exposure on the larger gross estate; below the USD 13.99 million exemption, the step-up wins decisively.

A "step-down" can occur when property has depreciated below the donor's basis; the basis steps DOWN to FMV at death, locking in the loss for the heir (who cannot then claim it). Selling depreciated property before death preserves the loss for the donor's final return.

Double-step-up: A married couple holding community property in a community-property state (California, Texas, Arizona, Nevada, Idaho, Louisiana, New Mexico, Washington, Wisconsin) receives a 100 percent step-up on the entire community property at the first spouse's death. Common-law states give a 50 percent step-up on jointly-held property at the first spouse's death (only the deceased spouse's half). This community-property step-up advantage is one of the most valuable planning differences between the two property regimes.

State-level estate and inheritance taxes

Twelve states plus the District of Columbia impose a state-level estate tax in 2025 with exemptions typically below the federal threshold: Connecticut (USD 13.61 million), Hawaii (USD 5.49 million), Illinois (USD 4 million), Maine (USD 6.8 million), Maryland (USD 5 million plus inheritance tax), Massachusetts (USD 2 million), Minnesota (USD 3 million), New York (USD 7.16 million), Oregon (USD 1 million), Rhode Island (USD 1.77 million), Vermont (USD 5 million), Washington (USD 2.193 million), plus DC (USD 4.875 million).

Six states impose an inheritance tax — paid by the heir on the inherited amount rather than by the estate — with rates and exemptions varying by relationship: Iowa (repealed effective 2025 deaths; legacy claims remain), Kentucky, Maryland (in addition to estate tax), Nebraska, New Jersey, and Pennsylvania. Direct lineal descendants are typically exempt or pay a low rate; siblings, more distant relatives, and unrelated heirs pay progressively higher rates topping out at 16 to 18 percent in some states.

A decedent who was a US person resident in a non-estate-tax state with property located in an estate-tax state may still owe the second-state estate tax on the in-state-located property. Domicile and situs rules govern; planning typically routes appreciated out-of-state property out of the high-tax state's reach through trust structures or sale-and-replacement transactions before death.

Marital deduction and the QTIP trust

The unlimited marital deduction under IRC §2056 permits transfers of any amount to a US-citizen surviving spouse free of federal estate tax. The deduction is a deferral, not a forgiveness: the transferred property is included in the surviving spouse's gross estate at their later death (unless consumed during life).

The most common structure that captures the marital deduction while maintaining the first spouse's control over ultimate disposition is the Qualified Terminable Interest Property (QTIP) trust under IRC §2056(b)(7). The QTIP trust pays all income annually to the surviving spouse for life (meeting the marital deduction requirements). At the surviving spouse's death, the principal passes to remainder beneficiaries chosen by the first-to-die spouse — typically children from a prior marriage, charitable beneficiaries, or specific bequests.

The QTIP election is made on Schedule M of Form 706 by the executor of the first-to-die spouse's estate. The transferred property is included in the surviving spouse's gross estate under IRC §2044, but the surviving spouse's executor can disclaim the QTIP election or allocate the surviving spouse's own exemption against the gross estate inclusion.

Transfers to non-US-citizen surviving spouses do NOT qualify for the unlimited marital deduction. Instead, they require a Qualified Domestic Trust (QDOT) under IRC §2056A to defer (not eliminate) the estate tax. Annual distributions of principal from a QDOT to the non-citizen surviving spouse are subject to estate tax at the first-spouse's marginal rate; income distributions are not.

Non-resident alien estate tax

Non-US-domiciled aliens (NRAs) face estate tax on US-situs property only, but at materially lower exemption levels and on a different rate schedule [SC6]. The NRA estate-tax exemption is USD 60,000 (not inflation-indexed since the 1980s), and the rate schedule produces marginal rates of 18 to 40 percent depending on taxable estate size. US-situs property for NRA estate-tax purposes includes US real estate, US tangible personal property, and shares of US-domiciled corporations.

The USD 60,000 NRA exemption is so low relative to the USD 13.99 million US-domiciled exemption that the differential is the single biggest planning concern for non-resident foreign nationals investing in US real estate. Common structures to mitigate include holding US real estate through foreign corporations (sometimes a foreign holding company that owns a US corporation), which converts US-situs real estate into foreign-corporation shares not subject to US estate tax.

Tax treaties may modify the NRA estate-tax result. The US has estate-tax treaties with 15 countries (Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Switzerland, United Kingdom). Treaty residents may claim treaty-based situs rules, sometimes a treaty-based exemption that exceeds the USD 60,000 statutory floor. The interaction is covered in the Tax treaty relief crossover.

Trust taxation for estate-planning structures

Most estate-planning trusts are either grantor trusts (income taxed to the grantor under IRC §§671-679) or complex trusts (income taxed at trust level if accumulated, or to beneficiary if distributed). Trust income tax brackets are compressed dramatically relative to individual brackets — the 37 percent top marginal rate kicks in at USD 15,200 of trust taxable income for 2025, versus USD 626,350 for single individuals.

Dynasty trusts, intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), charitable lead trusts (CLTs), and charitable remainder trusts (CRTs) are the specific vehicles used in high-net-worth estate planning. Each has its own GSTT, marital-deduction, and income-tax treatment.

For a comprehensive view of how estate tax interacts with the rest of the US federal stack, see the US federal tax overview. For the step-up basis interaction with capital gains, see Capital gains tax. For estate-tax mechanics applicable to cross-border families, see Expat tax residency and Tax treaty relief. The Estate and inheritance topic hub compares US treatment with other jurisdictions. Filers managing cross-border estate flows often use WorldFirst for international transfers and Tax1099 for Form 1099 issuance to estate-administered contractors. To find an estate-planning practitioner, browse the US tax-pros directory.