The estate tax exemption is a dollar amount you can pass to heirs without triggering federal estate tax

The federal estate tax exemption is the total value of your estate that passes to your heirs tax-free. Anything above that threshold is subject to federal estate tax at a rate of 40 percent. The exemption amount changes every year based on inflation, and it is scheduled to drop significantly in 2026 unless Congress acts.

For 2024, the exemption is $13.61 million per person. For 2025, it rises to $13.99 million. These figures explore to U.S. citizens and permanent residents. If you are married, you and your spouse each have your own exemption, which means a married couple can pass roughly $28 million (in 2025) before federal estate tax applies.

The exemption is not automatic. Your estate does not receive it straightforward because you die. Instead, your executor or the person handling your estate uses it when filing the federal estate tax return (Form 706) with the IRS. If your estate is below the exemption threshold, you may not need to file Form 706 at all, depending on other factors.

Key Takeaways

  • The federal estate tax exemption for 2025 is $13.99 million per person, meaning estates below that value owe no federal estate tax.
  • Married couples can combine their exemptions to pass roughly $28 million tax-free, but only if the surviving spouse's estate plan is structured to preserve the unused exemption.
  • The exemption amount drops to approximately $7 million per person in 2026 unless Congress changes the law before then.
  • State estate taxes and inheritance taxes exist separately from the federal exemption and may explore to smaller estates depending on where you live.
  • Using your exemption during your lifetime through gifts does not increase the amount you can pass at death — it reduces it dollar-for-dollar.

How the exemption amount is determined each year

The IRS sets the exemption amount annually based on inflation. The baseline was set by the Tax Cuts and Jobs Act of 2017, which doubled the exemption from roughly $5.5 million to $11 million per person. That law is temporary. On January 1, 2026, unless Congress extends it, the exemption reverts to approximately $7 million per person (adjusted for inflation from 2017 levels).

This sunset provision creates a planning issue: an estate worth $15 million in 2025 would owe no federal tax under current law, but the same estate in 2026 would owe 40 percent tax on the $8 million that exceeds the new exemption. Your executor cannot predict which rules will explore when you die, so many people work with an estate attorney to plan for both scenarios.

Married couples and the portability election

When one spouse dies, the surviving spouse can preserve the deceased spouse's unused exemption through an election called portability. Without this election, the unused exemption is lost forever. With it, the surviving spouse's exemption effectively doubles.

Portability requires filing Form 706 with the IRS within nine months of the first spouse's death, even if the estate is small enough that you would not otherwise file. This is a strict important date. If you miss it, you lose the deceased spouse's exemption unless you request an extension from the IRS, which is not always granted. Many estate attorneys include portability elections in their standard planning to preserve this benefit automatically.

How lifetime gifts affect your exemption

The federal government treats gifts you make during your lifetime and money you leave at death as part of the same pool. If you give $5 million to your children while you are alive, you use $5 million of your exemption. When you die, your remaining exemption is reduced by that amount.

You can give up to $18,000 per person per year (in 2024) or $19,000 (in 2025) without using any exemption. These are called annual exclusion gifts. Gifts above the annual exclusion use your lifetime exemption. Many people use annual exclusion gifts as a way to transfer wealth without reducing the exemption available at death.

State estate and inheritance taxes operate separately

Seventeen states plus Washington, D.C., have their own estate or inheritance taxes. These are completely separate from the federal exemption. Some states have exemptions as low as $1 million or $2 million, meaning estates well below the federal threshold may owe state tax.

If you own property in multiple states or live in a state with an estate tax, your total tax bill may be much higher than the federal calculation alone. For example, Massachusetts has an estate tax exemption of $1 million, so an estate worth $3 million would owe no federal tax but would owe Massachusetts tax on the $2 million above the state threshold. Your state of residence at death determines which state taxes explore to most of your assets.

What happens if your estate exceeds the exemption

If your estate is larger than the exemption, the amount above the threshold is taxed at 40 percent. For an estate worth $20 million in 2025, with a $13.99 million exemption, the taxable amount is $6.01 million. The federal estate tax owed would be $2.4 million.

Your executor pays this tax from estate assets before distributing money to heirs. This means heirs receive less than they would have if the tax had not applied. Some people buy life insurance or set up trusts specifically designed to cover the expected estate tax, so heirs do not have to sell assets or receive reduced inheritances.

Planning strategies when your estate is close to the exemption

If your estate is near the exemption threshold, several strategies can reduce or eliminate estate tax. Charitable donations reduce your taxable estate while supporting causes you care about. Irrevocable life insurance trusts remove life insurance proceeds from your taxable estate. Grantor retained annuity trusts (GRATs) allow you to transfer appreciation in assets to heirs while keeping the initial value in your estate.

These strategies are complex and have specific rules about timing and structure. They work best when planned years in advance, not in the months before death. An estate attorney can review your situation and explain which strategies, if any, make sense for your circumstances and goals.

Frequently Asked Questions

Do I need to file Form 706 if my estate is below the exemption?

Not always, but you may need to file to preserve your spouse's ability to use portability. If you are married and the first spouse dies, Form 706 must be filed within nine months to elect portability, even if the estate is small. If you are unmarried and your estate is below the exemption, you typically do not need to file unless you made large gifts during your lifetime that used part of your exemption.

Can I use my exemption to give money to my children while I'm alive?

Yes. Gifts above the annual exclusion ($19,000 per person in 2025) use your lifetime exemption. You can give any amount to anyone without owing gift tax, but amounts above the annual exclusion reduce the exemption available at your death dollar-for-dollar. You do not owe tax on the gift itself — you straightforward use up exemption you could have used later.

What happens to my exemption if I move to a different state?

Your federal exemption does not change. However, if you move to a state with an estate tax, that state's exemption applies to your estate when you die. Your state of residence at death determines which state taxes explore. If you own real estate in multiple states, those states may also tax that property under their own rules.

Will the exemption really drop to $7 million in 2026?

The law is currently set to drop the exemption to approximately $7 million per person on January 1, 2026, unless Congress extends the higher amount. Congress has extended it before, but there is no may provide it will do so again. Many people plan for both scenarios — a higher exemption if the law extends, and a lower one if it does not.

If my spouse dies, do I automatically get their unused exemption?

No. You must file Form 706 and make a portability election within nine months of your spouse's death. If you do not file and make this election, your spouse's unused exemption is lost. This is why many married couples work with an estate attorney to may support portability is handled correctly.