Estate Tax

The federal estate tax is the tax on the transfer of a decedent's property at death, filed on Form 706 and due nine months after the date of death. Everything is valued at the date-of-death value. Deductions are subtracted for debts, funeral costs, charitable gifts, and the unlimited marital deduction, and the exemption is applied: $15,000,000 per person for 2026, with 40% on the remainder. The exemption is unified with the lifetime gift tax, and portability lets a surviving spouse inherit the unused half on an election.

The reach is narrow: roughly two in a thousand American deaths owe federal estate tax, about 0.2%. State estate taxes are the separate risk, levied by about a dozen states with exemptions as low as $1 million in Oregon, and some states levy inheritance taxes on the recipient instead. The step-up in basis erases unrealized gains at death, which is why appreciated assets rarely pay capital gains and estate tax on the same dollars.

The machinery runs on Form 706, due nine months after death with a six-month extension available. The gross estate includes everything the decedent owned at date-of-death value: the home, the accounts, the business interest, and any life insurance the decedent owned or controlled. Deductions remove debts, funeral costs, charitable gifts, and everything left to a US-citizen spouse under the unlimited marital deduction. Then the $15 million exemption applies and 40% lands on the remainder.

Portability is the election that stacks the columns. When the first spouse dies with a $9 million estate, $6 million of exemption goes unused, and the survivor elects it on Form 706; skip the election and the unused half dies with the first spouse. Walk the arithmetic: spouse A dies with $9 million and no tax owed, and the family files and elects portability. Spouse B later dies with $20 million: $15 million own plus $6 million portable covers $21 million, so no federal tax is owed instead of $2 million.

The step-up in basis is the other half of the same transfer. Heirs inherit assets at date-of-death value, erasing the unrealized gain, so a stock bought at $100,000 and worth $900,000 at death passes with a $900,000 basis and no capital gains tax ever due. State estate tax stacks separately from all of it: an Oregon estate of $3 million owes nothing federal and roughly $175,000 to Oregon, whose table starts at $1 million.

The exemption is the number most families never need and the families with businesses always do. Life insurance owned by the decedent counts in the gross estate at the death benefit, which is the surprise line in the calculation, and the marital deduction makes the first death a non-event for citizen spouses. The paperwork, not the tax, is where most families go wrong.

I watched a colleague named Brent (yes, that Brent) skip Form 706 when his father died with a $9 million estate, because no tax was owed and the form looked optional. The $6 million of unused exemption was portable only if elected. When his mother died with a $20 million estate, the missing election cost $2 million: 40% on the $5 million the portable exclusion would have covered. The form was free; the skip was not.

The highest-leverage thing most American families can do is file Form 706 for portability at the first death even when no tax is owed, because the election is free and the unused exemption is worth millions later. Size the exposure with the estate tax calculator, price the gifting with the gift tax calculator, and read the step-up side in the step-up in basis entry.