Estate Tax Exemption Basics

The federal estate tax applies only to estates above a specific dollar threshold, known as the estate tax exemption — and that threshold is high enough that the federal estate tax affects a small fraction of estates in any given year, even though it draws outsized attention in financial media.

How the Exemption Works

The federal exemption is a dollar amount that each individual can pass to heirs — during life as gifts, at death, or a combination of both — without triggering federal estate or gift tax. The exemption is unified across lifetime gifts and death transfers: taxable gifts made during your lifetime above the annual gift tax exclusion reduce the exemption amount still available at death. The exemption amount is indexed for inflation and adjusted periodically by Congress, and it is scheduled to change under current law, so the specific figure should always be confirmed for the current year rather than assumed.

Portability Between Spouses

A surviving spouse can generally elect to use any of the deceased spouse's unused exemption amount, in addition to their own — a feature known as "portability." This requires filing an estate tax return for the deceased spouse even if no tax is owed, specifically to preserve that unused exemption for later use, which is a step that is sometimes missed.

The Annual Gift Tax Exclusion

Separate from the lifetime exemption, each person can give up to an annually-adjusted amount to any number of individuals each year without using any of their lifetime exemption or filing a gift tax return at all. A married couple can combine their exclusions to give a larger amount per recipient each year through "gift splitting." This is a commonly used tool for gradually transferring wealth to children or grandchildren over time, outside of the estate altogether.

State Estate and Inheritance Taxes

Several states impose their own estate tax, inheritance tax, or both — often at exemption thresholds far lower than the federal amount. Unlike the federal estate tax, some state inheritance taxes are paid by the recipient of an inheritance rather than by the estate itself, and rates can depend on the recipient's relationship to the deceased. Residency (and, for real estate, property location) determines which state's rules apply, which matters for anyone who splits time between states or owns property in more than one.

Planning Tools for Larger Estates

For estates likely to exceed the exemption, common strategies include:

• Irrevocable life insurance trusts (ILITs), which can keep life insurance proceeds outside the taxable estate.
• Grantor retained annuity trusts (GRATs) and other structures designed to transfer future appreciation to heirs at a reduced tax cost.
• Charitable trusts, which combine philanthropic goals with estate tax reduction.

Because exemption amounts, portability rules, and state-level taxes all change over time and vary by state, estates anywhere near the current thresholds should work with an estate planning attorney and tax professional rather than relying on a fixed dollar figure remembered from a prior year.

Sample content for demonstration purposes — not financial advice.