MSTR Cat

Trust Law/Level V · Tax and legacy/5.1 Estate and gift tax/Lesson 1

Estate and gift tax: the basics

How the US federal estate and gift taxes work together, what the basic exclusion is, and why most families today owe no federal estate tax.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. If the estate plus lifetime taxable gifts is under the 2026 basic exclusion of $15,000,000, no federal estate tax is due and no Form 706 is required; the catch is state tax, which starts at $1,000,000 in Oregon and $2,000,000 in Massachusetts.
  2. A married couple can shelter $30,000,000 in 2026 through the unlimited marital deduction for a US-citizen spouse plus a portability election on Form 706; executors with no filing duty may elect late under Rev. Proc. 2022-32, by the fifth anniversary of death.
  3. Below the exclusion, holding appreciated assets until death usually beats gifting them: heirs take a basis equal to value at death (IRC §1014), erasing tax on the gain, and community property steps up in full; gifted assets keep the donor’s basis.
  4. Gifts up to $19,000 per recipient in 2026, plus tuition or medical bills paid directly to the provider, use none of the exclusion; larger gifts need Form 709 by 15 April next year, but no tax is paid until $15,000,000 is used.
  5. Above the exclusion, tax on a closely held business worth over 35% of the adjusted gross estate can be paid in up to 10 installments (§6166), and §2032A can cut farm land value by up to $1,460,000 in 2026; both need timely Form 706 elections.

MaterialsThe IRS instructions for Form 706, the federal estate tax return, for the year you are reading aboutYour state’s tax agency page on estate or inheritance tax, if your state has oneA rough list of what you own and how each item is titled, for your own reference

Wonder

  1. Does leaving everything to a spouse mean no federal estate tax return is needed?
  2. Why do the figures change depending on the year of death?
  3. Which states have their own estate or inheritance tax?

Explore

  1. In the US, the federal estate tax and gift tax form one unified system. Taxable lifetime gifts and transfers at death draw on the same basic exclusion amount, applied through the unified credit (IRC §2010). The IRS gives the basic exclusion as $13,990,000 for 2025 and $15,000,000 for 2026, the 2026 figure set by the One Big Beautiful Bill Act of July 2025 and indexed for inflation from 2027. Above the exclusion, the top rate is 40% (IRC §2001). Figures change by year and by law, so always check which year applies.
  2. The donor, not the recipient, generally pays federal gift tax. Many gifts are not taxable at all: gifts up to the annual exclusion ($19,000 per recipient in 2025 and 2026; lesson 5.1.2), tuition or medical bills paid directly to the school or provider, gifts to a spouse and qualifying gifts to charity. Taxable gifts above those amounts are reported on Form 709 and use up part of the donor’s basic exclusion; gift tax is actually paid only once lifetime taxable gifts exceed it. What is used during life is not available again at death.
  3. The estate tax starts from the gross estate: broadly, everything the person owned or had certain interests in at death, at fair market value, including some assets that pass outside a will, such as many life insurance proceeds and jointly held property. Deductions then reduce it. The marital deduction is unlimited for property passing to a surviving spouse who is a US citizen; different rules apply for a non-citizen spouse. The charitable deduction covers qualifying bequests to charity. Debts and expenses of the estate are also deductible.
  4. The Form 706 instructions require a return when the gross estate, plus adjusted taxable gifts and specific exemption, is more than the basic exclusion for the year of death: $15,000,000 for deaths in 2026. The return is due 9 months after death, with an automatic 6-month extension available. An executor may also file to elect portability, passing a deceased spouse’s unused exclusion to the survivor, even when no return is otherwise required (lesson 3.3.1). With exclusions this high, most families will not owe any federal estate tax.
  5. States add their own layer. The Tax Foundation’s 2026 table reports that 12 states and the District of Columbia impose an estate tax and 5 states impose an inheritance tax, with Maryland the only state that has both. Several state thresholds are far below the federal one, so an estate can owe state tax but no federal tax. An inheritance tax is charged according to who receives the property, and close relatives are often exempt or taxed at lower rates. Rules and thresholds change, so check your own state’s current law.
  6. Other countries have separate systems. England and Wales, for example, have inheritance tax, with its own tax-free threshold known as the nil-rate band and its own rules on residence and trusts. US figures do not apply there, and UK figures do not apply in the US. People with property or family in more than one country can face both systems, and tax treaties may affect the result. This lesson describes how the US federal rules work; it does not suggest any particular plan.

Key facts

  • The US federal estate and gift taxes share one basic exclusion: $13,990,000 for 2025 and $15,000,000 for 2026 (One Big Beautiful Bill Act, July 2025).
  • A Form 706 is required when the gross estate plus adjusted taxable gifts and specific exemption is more than the basic exclusion for the year of death.
  • The top federal estate and gift tax rate is 40% (IRC §2001).
  • Transfers to a US-citizen surviving spouse qualify for an unlimited marital deduction, and qualifying bequests to charity are deductible.
  • Portability of a deceased spouse’s unused exclusion must be elected on a Form 706, even when no tax is due (lesson 3.3.1).
  • The Tax Foundation reports that in 2026, 12 states and DC impose an estate tax and 5 states an inheritance tax, with Maryland levying both.

Exercise nine, six, three, one

9CollectList up to 9 kinds of property or transfers that could count in a US gross estate or as lifetime gifts (some families have fewer), such as a home, bank accounts, retirement accounts, life insurance, a business interest or a large past gift.
6ClusterSort them into 6 categories: real estate, cash and investments, retirement accounts, life insurance, business interests, and lifetime gifts.
3DistillReduce the 6 categories to 3 groups: items that would pass to a spouse or charity, items that would pass to others, and items you are unsure how to value or count.
1CrystallizeWrite 1 sentence explaining, in your own words, why the federal estate and gift taxes are called a unified system.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS