Guide to Inheritance Taxes: Who Pays, How Much

Last updated 1 week ago. Our resources are updated regularly but please keep in mind that links, programs, policies, and contact information do change.

Understanding taxes related to death and inheritance can feel overwhelming, but knowing the basics is crucial for effective financial planning. This guide breaks down the different types of taxes involved—federal estate tax, state estate taxes, and state inheritance taxes—explaining who pays them, current regulations for 2025, and common strategies for managing these financial obligations.

Defining “Death Taxes”: Estate vs. Inheritance

When discussing taxes related to assets transferred after someone passes away, two primary types come into play in the United States: estate taxes and inheritance taxes. Though often confused, they differ significantly in who bears the responsibility for payment.

Estate Tax

This tax is levied on the total net value of a deceased person’s assets (their “estate”) before any assets are distributed to heirs or beneficiaries. The responsibility for paying the estate tax falls on the estate itself, typically handled by the executor or administrator. Think of it as a tax on the right to transfer property at death. Estate taxes can be imposed at both the federal and state levels — 12 states and the District of Columbia impose one of their own.

Inheritance Tax

This tax is imposed on the assets received by a beneficiary or heir from an estate. Unlike the estate tax, the responsibility for paying the inheritance tax falls on the individual beneficiary who inherits the property. Inheritance taxes are levied by only five states; there is no federal inheritance tax. The amount of inheritance tax often depends on the value of the inheritance received and the beneficiary’s relationship to the deceased person.

The Federal Estate Tax: Rules for 2026

The federal government imposes an estate tax, but due to a high exemption amount, fewer than one estate in a thousand in the U.S. owes this tax.

2026 Federal Exemption Amount

The key figure determining federal estate tax liability is the Basic Exclusion Amount (BEA). This is the amount of an estate’s value that is exempt from the tax. For estates of individuals dying in 2026, the federal BEA is $15,000,000 (it was $13,990,000 for deaths in 2025). This amount is adjusted annually for inflation, with the $15 million figure indexed from calendar year 2027 onward.

An estate tax return (IRS Form 706) generally only needs to be filed if the decedent’s gross estate, plus certain lifetime taxable gifts made after 1976, exceeds the $15 million threshold for deaths in 2026. Consequently, only the wealthiest estates are potentially subject to federal estate tax.

Federal Estate Tax Rates

For an estate whose value exceeds the $13.99 million exemption in 2025, the federal estate tax rate schedule comes into play, though not in the way the schedule’s graduated brackets suggest. The rate schedule in the law starts at 18% and tops out at 40%. But those rates apply to the cumulative taxable transfer — the whole taxable amount added up — not to the part above the exemption. The unified credit cancels the tax on everything up to the exclusion, which is $15 million in 2026. That is far above the $1 million mark where the 40% bracket begins. So in practice, every dollar of an estate above the exclusion is taxed at the top rate of 40%.

The table below shows that full schedule from the law. The unified credit covers every bracket below the exclusion. So these graduated rates are not applied to the amount exceeding the $13.99M exemption for 2025. They describe the cumulative taxable transfer — the whole taxable amount added up:

Federal Estate Tax Rate Schedule (cumulative taxable transfer; $13.99M Exemption in 2025)

For example, say an estate is worth $16 million in 2026. The taxable amount is $1 million ($16M − $15M). The unified credit has already used up the lower brackets, so that whole $1 million is taxed at the top rate of 40%. The tax is $400,000.

Portability: Sharing Exemptions Between Spouses

A significant feature of the federal estate tax system is “portability.” Portability allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. This unused amount is formally known as the Deceased Spousal Unused Exclusion (DSUE) amount.

In practical terms, portability enables a married couple to potentially shield up to double the individual exemption amount from federal estate tax. For 2026, this means a couple could potentially transfer up to $30 million ($15 million x 2) tax-free.

However, portability is not automatic. To secure the DSUE amount for the surviving spouse, the executor of the first deceased spouse’s estate must file a federal estate tax return (Form 706) and make the portability election on that return. This return must be filed timely – generally within 9 months of death, or 15 months if a 6-month filing extension is obtained. This filing requirement exists even if the first spouse’s estate is below the filing threshold and owes no federal estate tax.

Recognizing that some estates not otherwise required to file might miss this deadline, the IRS introduced a simplified procedure (Revenue Procedure 2022-32). This allows estates below the filing threshold to file Form 706 and elect portability up to five years after the decedent’s date of death, provided they follow specific instructions. This extended deadline is crucial because failing to make a timely portability election can result in the loss of potentially millions in exemption for the surviving spouse.

It’s important to note a few limitations: a surviving spouse can only use the DSUE amount from their last deceased spouse. The Generation-Skipping Transfer (GST) tax exemption is different. It belongs to one person alone, and none of it passes to a surviving spouse.

The 2026 “Sunset” That Never Happened

The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily doubled the federal estate tax exemption, which reached $13.99 million in 2025. That temporary increase never expired. A law signed on July 4, 2025 — Public Law 119-21 — changed section 2010(c)(3) of the tax code. It set the basic exclusion amount at $15 million for 2026, and that figure goes up with inflation in later years. That scheduled sunset at the end of 2025 did not happen. Congress repealed it before it took effect. The higher exemption is now permanent, and it rises with inflation from 2027 on. It does not drop back to the pre-TCJA amount.

The federal BEA did not revert; it rose to $15,000,000 per individual for 2026, and it is indexed for inflation for 2027 and later years.

The exemption rose to $15 million instead of falling to about $7 million. So the short planning window a sunset would have created never opened. For deaths in 2026, a federal estate tax return is required only if the gross estate plus adjusted taxable gifts comes to more than $15,000,000. Substantial lifetime gifts made before the end of 2025, when the sunset was still expected, have not been penalized now that the exemption has risen instead of falling. The IRS has issued regulations confirming that taxpayers taking advantage of the higher exclusion amount for gifts made between 2018 and 2025 will not be penalized if the exclusion amount decreases later.

The tax law signed on July 4, 2025 (Public Law 119-21) changed the tax code to set the basic exclusion amount at $15 million for 2026. That figure rises with inflation in 2027 and later years. So the exemption went up, not down. Estate planning still matters for large estates, but no longer because of a looming reduction in the federal exemption.

The Debate Over Whether the Federal Estate Tax Should Exist

In tax law, “permanent” means only that Congress wrote no end date into the statute. It does not settle the amount. The Agriculture Department’s Economic Research Service (ERS) notes that the American Taxpayer Relief Act of 2012 made the $5 million exemption permanent. Congress roughly doubled it five years later. The exemption has moved again and again, from $675,000 in 2000 to $13.61 million in 2024, while the top rate fell from 55% to 40%. Bills to abolish the tax and bills to expand it are both on file.

The Case for Repeal

On February 13, 2025, Sen. John Thune of South Dakota introduced the Death Tax Repeal Act of 2025 (S. 587). It had 45 original cosponsors. Rep. Randy Feenstra of Iowa introduced the House companion, H.R. 1301, the same day, with more than 170 original cosponsors. Both bills would end the estate tax and the generation-skipping transfer tax.

Supporters begin with double taxation. Most of what an estate holds was bought with wages, salary or business profit that already paid income tax. Charging tax again at death, they argue, takes a second cut of money the government has already taxed once.

Their second argument is about cash. The American Farm Bureau Federation says farm and ranch value is tied up in illiquid assets such as land, buildings and equipment — things that cannot be turned into cash quickly. ERS forecasts farm real estate at 83 percent of all farm sector assets in 2026. When a tax bill is larger than the cash on hand, an heir may have to sell land to pay it.

Third, they say the burden falls hardest on families who owe nothing. ERS estimated that about 41,104 estates were created by the deaths of principal farm operators in 2024. Of those, 266 would be required to file a return but would owe no estate tax. Those families still pay for appraisals, attorneys and accountants. On this view the real cost of the tax is the planning it forces, not the revenue it raises.

Repeal supporters also reject the usual alternative. When the estate tax lapsed in 2010, step-up in basis was replaced by a modified carryover of the decedent’s basis. Heirs had to work from what the owner originally paid, not the value at death. ERS notes that this added to the compliance burden, because farm assets may have been held for decades with limited documentation of their original cost. Farm Bureau therefore asks for repeal together with an unlimited stepped-up basis and no capital gains collected at death.

The Case for a Lower Exemption and Higher Rates

The opposing position is that the estate tax is the last federal tax that ever reaches a lifetime of investment gains.

An heir’s cost basis resets to the value on the date of death. Congress’s own research arm, the Congressional Research Service (CRS), explains that this step-up means no capital gains tax is paid on the appreciation of assets during the decedent’s lifetime. ERS makes the same point. Research suggests much of the appreciation in the value of assets in the estate has never been taxed, either as income or as capital gains, and thus will escape taxation completely.

The gap widens with size. CRS cites a study finding that capital gains were 13% of the assets of estates under $2 million and 55% of the assets of estates over $100 million. Supporters argue that repeal would let the largest fortunes pass untaxed, while the wages of the people who work for them are taxed every year.

Sen. Bernie Sanders of Vermont has been the leading sponsor. His For the 99.5 Percent Act (S. 994) would set the exemption at $3.5 million. He introduced it in March 2021 with Sens. Kirsten Gillibrand, Sheldon Whitehouse, Chris Van Hollen and Jack Reed. It would add rates of 45%, 50%, 55% and 65% on the largest transfers. The Treasury Department proposed a second route in its general explanations of the fiscal year 2025 revenue proposals. It would treat a gift or a death as a moment when gain is realized, and tax that gain.

This camp answers the farm objection rather than dismissing it. The Sanders bill would raise the special-use valuation limit for farmland from $750,000 to $3 million. Current law already lets qualifying farm estates value land at its farm use instead of its market value. That break is capped at $1,460,000 for deaths in 2026. An estate holding a closely held business can also spread the bill out: the law lets it pay in up to 10 equal installments, with the first due as late as five years after the normal payment date.

They read the farm figures the other way as well. ERS forecast that about 0.3 percent of 2024 farm operator estates, or roughly 141, would owe estate tax. CRS reported estate tax revenue of $13.2 billion in 2019. For 2018, it estimated that 71% of the tax was paid by the top 1% of the income distribution. To this camp those numbers describe a tax narrow enough to widen.

State Inheritance Taxes: A Closer Look

While there is no federal inheritance tax, a handful of states impose their own tax on inheritances received by beneficiaries.

Which States Impose Inheritance Tax?

As of 2026, the following five states levy an inheritance tax:

• Kentucky
• Maryland (Maryland uniquely imposes both an inheritance tax and a state estate tax)
• Nebraska
• New Jersey
• Pennsylvania

It is important to note that Iowa previously had an inheritance tax, but it was fully repealed for individuals dying on or after January 1, 2025.

Why States Disagree About Keeping an Inheritance Tax

Iowa’s repeal was one side of an argument that is still live in the five states that kept the tax. Nebraska contains both sides in a single bill.

Sen. Robert Clements introduced LB468 in Nebraska’s 2025 session. His statement of intent makes the case for cutting the tax. Beneficiaries pay one of three “drastically different” rates, depending on how they were related to the person who died. A niece or a friend faces 11% or 15% where a child faces 1%. The statement also says 38% of the tax is paid by 12% of beneficiaries.

Supporters of repeal say those heirs are often not wealthy people. Someone who inherits a share of farmland, a rental property or a small shop can owe the tax while earning an ordinary wage. They also argue that a state which keeps the tax gives older residents a reason to move away.

The same document sets out the strongest reason to keep it. Nebraska is the only state where inheritance tax revenue goes exclusively to the counties. Repeal does not remove the need for that money; it moves the cost to someone else. So LB468 proposed ten separate changes to county revenue sources to replace what counties would lose. They included a higher motor vehicle tax administration fee, a larger share of the insurance premium tax, and fee increases recommended by the Nebraska Association of County Officials.

Defenders also point to who actually pays. A spouse, a child or a parent inherits free of tax in Kentucky, Maryland and New Jersey. On that argument, the tax is aimed at windfalls passing outside the immediate family. Death is the one moment when a state can see the wealth clearly enough to tax it.

How State Inheritance Taxes Work

The core feature distinguishing inheritance tax from estate tax is that the beneficiary pays the tax based on what they receive. The tax calculation and liability are specific to each heir.

State inheritance tax laws typically categorize beneficiaries based on their relationship to the deceased person. This relationship dictates both the exemption amount (the value of inherited property not subject to tax) and the tax rate applied to the taxable portion.

Generally, the closer the familial relationship, the more favorable the tax treatment:

• Surviving spouses are almost always completely exempt from inheritance tax — Kentucky, Maryland, Nebraska and Pennsylvania all tax a surviving spouse’s share at zero, as does New Jersey.
• Direct lineal descendants (children, grandchildren) and often lineal ascendants (parents, grandparents) usually receive significant exemptions and face zero or very low tax rates.
• More distant relatives (like siblings, nieces, nephews, aunts, uncles) and unrelated individuals (like friends) typically face lower exemptions and significantly higher tax rates.

The tax is generally governed by the laws of the state where the deceased person lived at the time of death, or where tangible property (like real estate) owned by the deceased is located. The beneficiary’s state of residence usually does not determine the inheritance tax liability.

State-by-State Inheritance Tax Details (2025)

The rules vary significantly by state. Below is a summary table:

Summary of State Inheritance Taxes (as of 2026)

Table summarizes general rules; exemptions/rates are complex and subject to change. Always consult official state resources.

State Estate Taxes: An Overview

In addition to the federal estate tax, 12 states and the District of Columbia impose their own separate estate tax. Like the federal version, these taxes are paid by the estate based on the net value of assets before distribution.

States Are Moving in Opposite Directions

The lists and tables in this section record outcomes. Behind them is an argument that both sides have recently won.

Washington expanded its tax. Engrossed Substitute Senate Bill 5813 became Chapter 421 of the Laws of 2025. It passed the Senate 27 to 21 and the House 53 to 45. Gov. Bob Ferguson signed it on May 20, 2025.

The legislature wrote its reasoning into the law. The money goes to the education legacy trust account. The law sets out to create “a more progressive rate structure for the estate tax by increasing the top tier rates up to 35 percent” and to raise the exclusion amount to $3,000,000. The same section gives the fairness claim behind it: low-income Washingtonians pay at least three times more in state and local taxes as a percentage of their income than the state’s highest-income households. On that argument, an estate tax reaches wealth the state cannot otherwise touch. Raising the exclusion along with the top rate keeps it aimed at the largest estates.

Other states went the other way. New Jersey ended its estate tax altogether: New Jersey Estate Tax is no longer imposed for individuals who died on or after January 1, 2018. Its inheritance tax remains. Connecticut stopped setting its own threshold. For deaths on or after January 1, 2023, its statute taxes only the Connecticut taxable estate above the federal basic exclusion amount.

The case for retreat has two parts. State thresholds sit far below the federal one, so an estate can owe state tax while owing the IRS nothing. Compare Oregon’s $1,000,000 threshold with the federal $15,000,000. Repeal supporters also argue that wealthy older residents respond by moving.

That second claim has been tested. Economists Jon Bakija and Joel Slemrod studied it in a 2004 paper for the National Bureau of Economic Research. They looked at federal estate tax returns filed by state over 18 years. They found that high state inheritance and estate taxes have statistically significant, but modest, negative impacts on the number of federal estate tax returns filed in a state. In plain words, the effect is real but small. The same paper concluded that the resulting revenue and efficiency losses would not be large relative to the revenue raised by the tax. Each side quotes a different half of that finding.

Which Jurisdictions Impose a State Estate Tax?

The jurisdictions with a state-level estate tax in 2025 are:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland (Also has inheritance tax)
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

How State Estate Taxes Differ from Federal

While conceptually similar to the federal tax, state estate taxes have crucial differences:

Lower Exemption Amounts

This is the most significant difference. State estate tax exemptions are typically much lower than the federal $15 million. For 2026, exemptions range from $1 million in Oregon to $7.35 million in New York, with many states falling between $2 million and $5 million. Connecticut currently aligns with the federal exemption.

Because these thresholds are considerably lower, many more estates are potentially subject to state estate tax than federal estate tax. This makes understanding state rules critical for residents of these jurisdictions, even those with moderate wealth.

Varying Tax Rates

State tax rates also differ from the federal structure and from each other. Top rates — the rate charged on the last dollar — often reach 16%. A few states go higher: Hawaii and Washington reach 20%. Connecticut and Maine stop at 12%. Washington’s top rate was raised for a time to 35%, for deaths between July 1, 2025 and June 30, 2026.

Lack of Portability (Usually)

Unlike the federal system, most states with an estate tax do not allow portability of unused exemptions between spouses. Notable exceptions currently include Maryland, Hawaii, and potentially Connecticut due to its alignment with the federal exemption.

The general lack of state-level portability means married couples in these states often need to use more traditional estate planning techniques, such as bypass trusts (discussed later), to ensure both spouses’ state exemptions are utilized effectively. Relying solely on the unlimited marital deduction (leaving everything to the surviving spouse) could result in wasting the first spouse’s state exemption, leading to higher state estate taxes upon the second spouse’s death.

Other State-Specific Rules

Some states have unique provisions, such as New York’s “cliff tax,” where estates exceeding the exemption by a certain percentage lose the exemption entirely and are taxed from the first dollar. Some states include certain lifetime gifts made within a specific period before death in the estate calculation. Some states allow or require separate state-level Qualified Terminable Interest Property (QTIP) elections.

State-by-State Estate Tax Details (2026)

The following table summarizes key details for jurisdictions with state estate taxes:

Summary of State Estate Taxes (as of 2026)

Exemption amounts are per individual and based on the latest available information for 2025 or the most recent year cited in sources. Rates are often progressive; ranges are approximate. Always verify with the official state source.

What Assets Are Part of a Taxable Estate?

To calculate potential estate tax, one must first determine the “Gross Estate.” This is the starting point and encompasses the value of nearly all property the decedent owned or had certain interests in at the time of death.

Common Types of Included Assets

The gross estate typically includes a wide range of assets:

• Real Estate: Homes, vacation properties, rental properties, land.
• Financial Accounts: Cash, checking and savings accounts, certificates of deposit (CDs), money market accounts, brokerage accounts, stocks, bonds (corporate, municipal, foreign).
• Retirement Accounts: The value of accounts like 401(k)s, IRAs, and other retirement plans at the date of death.
• Life Insurance: Proceeds from policies on the decedent’s life if the decedent owned the policy or retained incidents of ownership.
• Business Interests: Value of ownership in sole proprietorships, partnerships, LLCs, or closely held corporations. Farm assets are also included.
• Personal Property: Cars, boats, furniture, jewelry, artwork, antiques, collectibles.
• Assets in Revocable Trusts: Property held in a trust that the decedent could revoke or amend during their lifetime is included.
• Certain Annuities: The value of payments due to a beneficiary surviving the decedent.
• Other Assets: Intangible property like patents, copyrights, royalties, and certain interests in property transferred during life where the decedent retained control or benefits (e.g., retained life estate).
• Certain Lifetime Gifts: Gifts made within three years of death may sometimes be “clawed back” into the estate for tax calculation purposes, particularly transfers of life insurance policies or gifts where certain rights were retained. Some states have specific rules about including recent gifts.

It is a common misunderstanding that only assets passing through probate (the court process for validating a will and distributing assets) are counted for estate tax purposes. The “gross estate” is significantly broader. It includes many assets that avoid probate, such as property held in a revocable living trust, assets owned jointly with right of survivorship, and life insurance proceeds paid directly to a beneficiary if the decedent owned the policy. For a joint interest held with a spouse, half the value is included; for other joint owners, the full value is included except any part the survivor can show they paid for themselves. Therefore, using tools like living trusts to avoid probate does not automatically eliminate potential estate tax liability.

Basic Principles of Asset Valuation

Assets included in the gross estate are generally valued at their Fair Market Value (FMV) as of the decedent’s date of death. The FMV is essentially the price the asset would sell for on the open market between a knowledgeable, willing buyer and a knowledgeable, willing seller, with neither under pressure to act.

This means the value used for tax purposes is the current market value, not what the decedent originally paid for the asset. Any appreciation in value over the decedent’s lifetime is captured in the estate valuation.

Valuation methods vary by asset type:

• Cash and bank accounts are valued at their face value.
• Publicly traded stocks and bonds are typically valued based on the average of the high and low trading prices on the date of death.
• Real estate, closely held businesses, and unique items like art or collectibles usually require a formal appraisal by a qualified professional to determine FMV.

In some circumstances, the executor may elect an Alternate Valuation Date, which is six months after the date of death. This election is only permissible if it results in a decrease in both the value of the gross estate and the amount of estate tax due.

Once the gross estate is valued, certain deductions are subtracted to arrive at the “Taxable Estate.” Common deductions include mortgages and debts owed by the decedent, funeral expenses, estate administration costs (like attorney and appraisal fees), property passing to a surviving U.S. citizen spouse (under the unlimited marital deduction), and bequests to qualified charities — reported on Schedules J, K, M and O of Form 706.

Common Strategies to Manage Estate and Inheritance Taxes

While taxes on significant estates can be substantial, several legitimate strategies and financial planning tools can help manage or potentially reduce these obligations. These approaches generally aim to reduce the size of the taxable estate or utilize available exemptions and deductions effectively. Implementing these strategies often involves complex legal and tax considerations, making professional advice essential.

Making Annual Tax-Free Gifts

One straightforward strategy is to make lifetime gifts using the annual gift tax exclusion. Federal law allows individuals to give away a certain amount of money or assets each year to any number of recipients without incurring gift tax or using up their lifetime gift and estate tax exemption.

For 2026, the annual gift tax exclusion amount is $19,000 per recipient, unchanged from 2025. This means one person could give $19,000 in 2026 to each of their children, grandchildren, or anyone else, with no gift tax to pay. For gifts of that size handed straight to the person, rather than into a trust, there is usually no need to file Form 709, the federal gift tax return.

Married couples can combine their exclusions through “gift splitting,” allowing them to give up to $38,000 per recipient in 2026. Importantly, electing gift splitting requires filing a federal gift tax return (Form 709), even if no tax is due, to signify the consent of both spouses.

Making consistent use of the annual exclusion over many years can significantly reduce the value of an individual’s taxable estate, passing wealth to the next generation tax-efficiently. Payments made directly to educational institutions for tuition or to medical providers for healthcare expenses on behalf of someone else are generally not considered taxable gifts and do not count against the annual exclusion limit.

Utilizing the Lifetime Gift Tax Exemption

Beyond the annual exclusion, individuals have a substantial lifetime exemption that applies to both gift and estate taxes ($15 million for 2026). Gifts made during life that exceed the annual exclusion amount reduce this lifetime exemption.

Making large lifetime gifts, up to the available lifetime exemption amount, can be a powerful strategy. It removes the gifted assets from the donor’s estate, meaning those assets—and any future appreciation or income they generate—will not be subject to estate tax upon the donor’s death. With the exemption now set at $15 million for 2026 and indexed for inflation from 2027 onward, no deadline forces large gifts. The case for lifetime gifting now rests on that removal alone, not on a closing window.

The Unlimited Marital Deduction

For married couples where both spouses are U.S. citizens, federal tax law provides an unlimited marital deduction. This allows spouses to transfer unlimited amounts of assets to each other, either during life or at death, without incurring federal gift or estate tax.

This deduction effectively defers estate tax rather than eliminating it. The assets transferred to the surviving spouse will be included in their estate upon their subsequent death and potentially taxed at that time. Special rules apply to transfers involving non-U.S. citizen spouses (often requiring a Qualified Domestic Trust or QDOT) and certain types of property interests known as “terminable interests”.

Making Charitable Donations

Charitable giving can also play a role in estate tax planning. Bequests made to qualified charitable organizations at death are generally fully deductible from the gross estate for federal estate tax purposes. This deduction reduces the value of the taxable estate dollar-for-dollar.

Lifetime gifts to charity can also reduce the future taxable estate and may provide current income tax deductions. More complex strategies, such as Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs), allow individuals to structure gifts that benefit both charity and non-charitable beneficiaries (like family members) while potentially achieving tax advantages.

Using Trusts

Trusts are versatile legal tools frequently used in estate planning to manage assets, control distributions, and achieve tax objectives. Two types often employed in estate tax planning are:

Irrevocable Life Insurance Trust (ILIT)

An ILIT is specifically designed to own a life insurance policy. The person creating the trust (the grantor) makes gifts to the trust, and the trustee uses those funds to pay the policy premiums. Because the trust, not the grantor, owns the policy, the death benefit proceeds are paid to the trust upon the grantor’s death and are generally excluded from the grantor’s taxable estate.

These tax-free proceeds can then provide liquidity to the beneficiaries or the estate (e.g., to pay estate taxes or other debts) without increasing the estate tax liability. Setting up and funding an ILIT involves specific rules, including the trust being irrevocable (meaning the grantor generally cannot change it) and managing potential gift tax implications on premium payments (often addressed using “Crummey” withdrawal rights for beneficiaries to qualify contributions for the annual exclusion).

Bypass Trust (Credit Shelter Trust or B Trust)

This type of irrevocable trust is commonly used by married couples, particularly when aiming to utilize both spouses’ estate tax exemptions (especially relevant in states without portability) or for generation-skipping planning. When the first spouse dies, assets up to their available exemption amount are transferred into the Bypass Trust.

The surviving spouse can typically receive income from the trust and may have limited access to the principal (e.g., for health, education, maintenance, support). However, because the surviving spouse doesn’t own the trust assets, the assets (including any appreciation) are not included in the survivor’s estate upon their death. This “bypasses” the survivor’s estate for tax purposes, preserving the first spouse’s exemption and potentially reducing overall estate taxes for the couple.

Bypass trusts are also useful for protecting assets for children from a previous marriage or preserving the Generation-Skipping Transfer (GST) tax exemption, which is not portable.

These strategies often interact and involve intricate rules. For instance, funding a Bypass Trust requires careful asset titling, while ILITs need precise Crummey notice procedures. State laws add another layer of complexity. Consequently, effective estate tax planning typically requires a coordinated approach involving experienced legal, tax, and financial advisors to tailor strategies to individual circumstances and ensure compliance.

Filing Tax Returns and Paying the Tax

Administering an estate involves specific tax filing responsibilities handled by the estate’s representative.

Responsibility for Filing and Payment

The executor (if named in a will) or the administrator (if appointed by a court when there is no will), also referred to as the personal representative, is legally responsible for managing the estate. This includes filing all required federal and state estate tax returns and paying any taxes owed using the estate’s assets before distributing the remainder to beneficiaries.

Federal Estate Tax Return (IRS Form 706)

• The Form: The primary federal return is IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
• Who Must File: Filing is required if the decedent’s gross estate plus adjusted taxable lifetime gifts exceeds the Basic Exclusion Amount ($15 million for deaths in 2026). Filing is also required, regardless of estate size, if the estate intends to elect portability of the DSUE amount to the surviving spouse.
• Deadline to File: Form 706 is due nine months after the decedent’s date of death.
• Extension to File: An automatic six-month extension of the filing deadline can be requested by filing Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, before the original nine-month due date. This pushes the filing deadline to 15 months after death.
• Deadline to Pay: Crucially, any federal estate tax owed is due nine months after the date of death, even if a filing extension is granted. Late payments accrue interest and potential penalties.
• Portability Election Deadline: The portability election must be made on a timely filed Form 706 (within the 9-month or 15-month deadline). Missing this deadline generally means forfeiting the DSUE amount for the surviving spouse.
• Special Portability Filing Extension (Rev. Proc. 2022-32): A special rule exists for estates that are not required to file based on value (i.e., below the $15 million threshold for deaths in 2026) but missed the deadline to elect portability. These estates can file Form 706 to make the election up to five years after the date of death by following specific procedures outlined in Rev. Proc. 2022-32. This five-year window provides significant relief but only applies in these specific circumstances.
• Where to File: Form 706 is generally mailed to the IRS Center in Kansas City, MO. Electronic payment options are available via the Electronic Federal Tax Payment System (EFTPS).
• Other Federal Forms: Estates of nonresidents who were not U.S. citizens use Form 706-NA. Lifetime gifts exceeding the annual exclusion are reported on Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, which is typically due April 15 of the year after the gift is made.

State Tax Returns

If the decedent lived in or owned property in a state with its own estate or inheritance tax, separate state tax returns must also be filed.

• Check State Requirements: The executor must determine the filing requirements and forms for each applicable state.
• State-Specific Forms: Each state has its own forms (e.g., Pennsylvania uses REV-1500 for inheritance tax; Oregon uses OR-706 for estate tax; Rhode Island uses RI-706).
• Varying Deadlines: State filing and payment deadlines differ. For example, Connecticut’s estate tax return is due 6 months after death (Conn. Gen. Stat. Sec. 12-392), while Pennsylvania’s inheritance tax return is due 9 months after death, Oregon’s estate tax return is due 12 months after death (for deaths after 1/1/22), and Kentucky’s inheritance tax return is due 18 months after death if tax is owed. Always verify the specific state deadline.
• Filing Location: State returns are filed with the respective state’s department of revenue or equivalent agency (sometimes through a county office, like the Register of Wills in Pennsylvania).

Additional Resources

For more detailed information about estate and inheritance taxes, consider these resources:

• IRS Estate and Gift Taxes
• IRS Form 706 Instructions
• Federation of Tax Administrators – State Tax Agencies
• American College of Trust and Estate Counsel
• National Association of Estate Planners & Councils

Our articles make government information more accessible. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances.