The federal estate tax, the “death tax,” sounds scary. But here’s the reality: fewer than 0.1% of estates ever owe it. Here’s how it works, who actually pays, and why most families can stop worrying.
How the federal estate tax works
When you die, the IRS totals up everything you own, real estate, investments, business interests, life insurance proceeds, and applies a tax rate of 18% to 40% on the amount above the exemption. The tax is due from the estate, not the heirs, and it’s separate from any income tax.
The exemption (who actually pays)
For 2026, the federal exemption is $15 million per person ($30 million for a married couple). Only the amount above that threshold is taxed. If your estate is worth $16 million and the exemption is $15 million, tax applies to just $1 million. Fewer than 2,000 estates per year owe any federal estate tax.
Congress made it permanent: the sunset that didn’t happen
The doubled exemption was originally scheduled to sunset at the end of 2025, which would have cut it roughly in half. Instead, Congress acted in 2025 and made the higher exemption permanent at $15 million per individual, indexed for inflation going forward. That removed years of planning uncertainty. Unless Congress changes the law again, the $15 million figure (adjusted upward for inflation each year) is the new normal.
A worked example: the $16 million estate
Take an individual who dies in 2026 with a $16 million estate. Subtract the $15 million exemption, leaving $1 million subject to tax. At the top 40% rate, that’s about $400,000 in federal estate tax. Note the key point: the tax applies only to the amount above the exemption, not the whole estate. A $16 million estate doesn’t pay tax on $16 million; it pays on $1 million. Below $15 million, the federal bill is zero.
Why most people don’t owe it
Simple math: the vast majority of Americans die with estates well under $15 million. If that’s you, the federal estate tax is irrelevant. (State estate taxes are a different story, since some states have much lower exemptions, so check your state’s rules.)
State estate taxes: the real trap
About a dozen states plus Washington, D.C. impose their own estate or inheritance taxes, and their exemptions are far lower than the federal $15 million, some as low as $1-2 million. You can owe zero federal estate tax and still face a state bill. If you live in Massachusetts, Oregon, New York, or another state with its own estate tax, the state rules matter far more to your planning than the federal ones. Check your state’s current exemption before assuming you’re in the clear.
Portability: the surviving spouse’s double exemption
Married couples get an extra break called portability. When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse, effectively giving the survivor up to $30 million of shelter. But portability isn’t automatic: the executor must file a federal estate tax return (Form 706) to claim it, even when no tax is owed. Skipping that filing is one of the most common and costly estate-planning oversights.
Three estate-tax mistakes
First, assuming the exemption will always be this high. Congress made it permanent, but Congress can also change it; large estates should build flexibility into their plans. Second, ignoring state estate taxes while focusing only on the federal $15 million. Third, failing to file Form 706 to preserve portability after a spouse’s death, which can waste millions in exemption. For estates anywhere near the threshold, a qualified estate attorney pays for itself.
Planning around it
If you’re near the threshold, lifetime gifts, trusts, and charitable giving can reduce your taxable estate. A revocable living trust doesn’t avoid the estate tax by itself, but it’s the foundation of most estate plans. Our review of The Only Living Trusts Book You’ll Ever Need explains how they work. And if you’re wondering how assets transfer at death, see our explainer on what probate is.
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