[EP-05] Estate and Inheritance Taxes

The federal tax you almost certainly won’t owe, and the state tax you might — plus the form that loses $15M by not being filed

Pillar: Estate Planning & Risk Management · Applies to: Anyone with an estate above roughly $1M who lives in, owns property in, or plans to move to one of the 17 taxing jurisdictions Last verified: August 2026 · Refresh cadence: Annual for figures (via FN-02 and ST-04 §2) + event-driven when a state changes an exemption Related: ST-04 Quick-Reference Tables · ST-01 Six State Dimensions · ST-02 Retirement-Friendly States · ST-03 Changing Domicile · EP-01 Core Document Stack · TX-01 0% Capital Gains · TX-04 RMDs & Inherited IRAs · FN-02 Key Numbers

Not advice. Transfer tax is the area of this wiki where the gap between “understanding the rule” and “having a valid document” is widest, and the mistakes are discovered by your heirs, who cannot fix them. Every structure named here — bypass trusts, ILITs, QDOTs, disclaimers — requires drafting by an estate attorney licensed in your state. Use this page to know what to ask for.

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TL;DR

• The federal estate tax is $15,000,000 per person / $30,000,000 per couple at a 40% top rate, made permanent by OBBBA ✅. Fewer than one estate in a thousand owes it. If you are reading this because you fear the federal estate tax, you have probably misdiagnosed your problem.
• The tax that will actually reach this wiki’s audience is the state one: 12 states plus DC levy an estate tax, 5 levy an inheritance tax, Maryland levies both ✅. Oregon starts at $1,000,000 — a paid-off house and a 401(k) clear it.
• Federal portability is not automatic. The surviving spouse inherits the unused exemption only if an estate tax return is filed — even when no tax is due. Nine months, fifteen with extension, and up to five years under the simplified late election of Rev. Proc. 2022-32 ✅.
• State portability essentially does not exist. A Washington couple with $6,000,000 who does nothing pays $390,000; the same couple with a credit-shelter trust pays $0. §5 shows the arithmetic — the document is the entire difference.
• The counterintuitive one: gifting appreciated assets to escape a state estate tax usually loses money, because you give up the basis step-up. §6 derives the break-even — gift high-basis assets, bequeath low-basis ones.

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1. Three federal taxes, one exemption

The federal transfer tax system is three taxes sharing a single lifetime number:

Tax	Applies to	2026 exemption	Rate
Estate	Transfers at death	$15,000,000 ✅	40% ✅
Gift	Transfers during life above the annual exclusion	the same $15,000,000 — unified ✅	40% ✅
Generation-skipping (GST)	Transfers to grandchildren or later generations	$15,000,000, separate but equal ✅	40% flat ✅

Two mechanics do most of the work.

The exemption is unified between gift and estate. Every dollar of lifetime gifting above the annual exclusion consumes estate exemption. You do not get $15M of gifts and $15M at death.

The annual exclusion is separate and does not touch the exemption. $19,000 per recipient per year in 2026 ✅ — a couple can move $38,000 to each child, each year, forever, filing nothing. This is the entire gifting program most families need.

The GST exemption is not portable. ✅ Estate and gift exemption can pass to a surviving spouse (§3); GST exemption cannot. It is use-it-or-lose-it at each death, which is why generation-skipping trusts get funded at the first death rather than the second.

2. What is actually in the taxable estate

The gross estate is broader than most people’s mental model, and three inclusions cause nearly all the surprises:

• Life insurance you own on your own life. The full death benefit is in your estate if you hold any incident of ownership ◻️. A $2,000,000 policy bought to provide liquidity for estate tax can be the thing that creates it. The fix is an irrevocable life insurance trust (ILIT) owning the policy from inception → [EP-02].
• Retirement accounts — and they are taxed twice over. Your traditional IRA counts at full value in the estate, and the heirs then pay ordinary income tax on every dollar they withdraw. Retirement accounts are income in respect of a decedent: they get no basis step-up ✅. Combined with the 10-year rule (TX-04), a large traditional IRA is the worst asset to leave to an estate-taxed heir and the best one to leave to charity.
• The house, at full market value, wherever it sits. Real property is taxed by the state it is located in, not the state you live in — an Oregon rental owned by a Nevada retiree can drag them into Oregon’s $1M regime ◻️ (ST-03).

Against this you subtract debts, administration expenses, charitable bequests, and the unlimited marital deduction — everything passing to a U.S.-citizen spouse is deductible without limit ✅. That last one is what makes the trap in §5 possible: the marital deduction is so easy that it silently wastes the first exemption.

3. Portability: the form nobody files

Federally, a surviving spouse can add the deceased spouse’s unused exclusion — the DSUE — to their own, taking a couple to a combined $30,000,000. It is not automatic.

The DSUE exists only if the executor files a Form 706 for the first death and elects portability — even when the estate owes nothing and would otherwise never file. ✅ The deadlines:

Window	Rule
9 months from death	Normal Form 706 deadline ✅
15 months	With the automatic 6-month extension ✅
5 years	Simplified late election under Rev. Proc. 2022-32, available where no return was otherwise required. Write at the top of the return that it is “filed pursuant to Rev. Proc. 2022-32 to elect portability under § 2010(c)(5)(A)” ✅

The five-year window is the most useful under-known rule on this page. If your spouse died within the last five years and no 706 was filed, this is likely still fixable, and it is worth up to $15,000,000 of shelter. Past five years it takes a private letter ruling.

Two caveats worth knowing before relying on portability: the DSUE is frozen at the dollar amount from the first death and does not index upward afterwards ◻️, and it is lost if the survivor remarries and that spouse also predeceases them — you may only use the DSUE of your last deceased spouse ◻️.

4. The state patchwork

Estate tax is levied on the estate before distribution. Inheritance tax is levied on the recipient, at a rate set by their relationship to the deceased. They are different taxes with different payers, and a state may have one, both, or neither — the single most common error in national summaries.

Current membership lists and exemption amounts live in ST-04 §2 and are not repeated here — one canonical page per concept. The mechanics that matter:

• The exemptions are an order of magnitude below federal. Oregon $1,000,000; Massachusetts $2,000,000; Washington $3,000,000 ✅. The band that pays state estate tax — roughly $1M to $7M — is precisely the band federal planning ignores.
• Rates are lower but not trivial — mostly topping out at 16%, Washington and Hawaii at 20% ✅.
• Inheritance tax is about who inherits, not how much. Pennsylvania’s ladder, on an identical $1,000,000 bequest ✅:

Heir	Rate	Tax
Spouse	0%	$0
Adult child / lineal descendant	4.5%	$45,000
Sibling	12%	$120,000
Niece, nephew, friend	15%	$150,000

Leaving the same money to a sibling instead of a child costs $75,000. For childless retirees — a large share of the FIRE cohort — this is the single most consequential line in state transfer tax, and it is a beneficiary-designation decision, not a trust decision (EP-01).

• Two states reach backwards. Connecticut is the only state with its own gift tax ✅, and Minnesota adds back taxable gifts made within three years of death ✅. Elsewhere, a deathbed gift genuinely removes the asset — which is why §6 matters.

5. The no-portability trap, priced

Most estate-tax states have no portability — but two do. Maryland allows a surviving spouse to claim the deceased spousal unused exclusion by filing Form MET-1, and uniquely permits a portability-only return up to two years after death ✅; Hawaii allows it via Part 2 of Form M-6, on the ordinary nine-month deadline ✅. Everywhere else in the estate-tax states, portability does not exist ◻️.

Absent it, the default outcome — everything passing outright to the surviving spouse under the marital deduction — throws away the first spouse’s entire state exemption. This is not an edge case. It is what happens when a couple does nothing.

A Washington couple, $6,000,000 combined estate, two adult children. Washington’s exclusion is $3,000,000, frozen ✅, and its restored schedule runs 10% on the first $1,000,000 of taxable estate, 14% on the next, 15% on the next ✅.

Path A — everything to the survivor (the default).

Event	Result
First death	Marital deduction, $0 tax — and the decedent’s $3,000,000 exclusion is lost
Second death	$6,000,000 − $3,000,000 = $3,000,000 taxable
	$1,000,000 @ 10% = $100,000 · $1,000,000 @ 14% = $140,000 · $1,000,000 @ 15% = $150,000
Washington estate tax	$390,000

Path B — a credit-shelter (bypass) trust funded at the first death.

Event	Result
First death	$3,000,000 into the bypass trust, using the decedent’s exclusion → $0 tax. The survivor still receives income and, typically, principal for health, education, maintenance, and support
Second death	Survivor’s own $3,000,000 against their own $3,000,000 exclusion → $0 taxable
Washington estate tax	$0

The document is worth $390,000. Same assets, same heirs, same state — the only difference is whether the first exclusion was used or discarded.

How the trap scales, same state and structure:

Estate	Outright to survivor	With credit shelter	Cost of doing nothing
$3,000,000	$0	$0	$0
$4,000,000	$100,000	$0	$100,000
$5,000,000	$240,000	$0	$240,000
$6,000,000	$390,000	$0	$390,000
$8,000,000	$730,000	$240,000	$490,000
$10,000,000	$1,100,000	$550,000	$550,000

Note where the pain concentrates: between one and two exclusions the trust eliminates the tax outright — 100% of it ($3M–$6M in Washington, $1M–$2M in Oregon). Above two exclusions it still helps but no longer zeroes the bill: 67% of the tax at $8M, 50% at $10M. The trust is a complete answer in the band most readers are in, and a partial one above it.

Above two exclusions a second technique appears: because the rate ladder is progressive, deliberately making a taxable transfer at the first death — splitting $4M of taxable estate into $2M taxed twice rather than $4M taxed once — saves a further $70,000 at $10M ◻️. It costs tax paid years early and moves assets away from the survivor, so it is a question for an attorney, not a default.

The cheaper cousin: the disclaimer trust. Rather than mandating the split, the will leaves everything to the survivor with a bypass trust standing by; the survivor has nine months to disclaim assets into it ◻️. This buys a decision made with real information — knowing the actual estate size, the actual law, and the actual state of residence — instead of one guessed at in advance. It fails if the survivor has already accepted benefits from the assets, and it requires a survivor willing to sign.

6. Gift versus bequeath: the step-up tradeoff

The intuitive response to a state estate tax is to give assets away. For appreciated assets this usually loses money, and the reason is the interaction nobody prices: gifts carry over your basis; bequests get a step-up ✅ (TX-01).

$500,000 of stock, basis $100,000, so $400,000 of embedded gain. The estate is over the state exclusion, so the marginal state estate rate is 10%. The heirs are working-age and would pay 15% federal plus the 3.8% NIIT = 18.8% on a sale ✅ (FN-02).

	Gift it now	Hold until death
State estate tax	avoided: +$50,000	paid: −$50,000
Capital gains	heirs take carryover basis; −$75,200 when they sell	step-up erases $400,000 of gain: +$75,200
Net	−$25,200	+$25,200

Holding beats gifting by $50,400 on this asset — and the gift also consumed $500,000 of federal exemption for nothing.

The break-even is clean enough to carry in your head:

Gifting wins when the estate tax avoided (on the whole value) exceeds the capital-gains tax created (on the gain) — that is, when V × rate_estate > G × rate_gains:

Break-even embedded gain = state estate rate ÷ heir’s capital-gains rate Here: 10% ÷ 18.8% = 53.2% of value — equivalently, a basis of 46.8%.

Below ~53% embedded gain (basis above ~47%), gifting wins; above ~53% gain, the step-up wins. Watch which ratio you are reading: the gain threshold and the basis threshold are complements, and they are easy to transpose.

Basis as % of value	Gain as % of value	Embedded gain	Winner
20%	80%	$400,000	hold
40%	60%	$300,000	hold
60%	40%	$200,000	gift
80%	20%	$100,000	gift
100% (cash)	0%	$0	gift

The rule that falls out: gift cash and high-basis assets; bequeath low-basis assets. And note the corollary for the charitably inclined — the ranking reverses for a traditional IRA, which gets no step-up at all, so it is the best asset to give to charity and the worst to bequeath to a taxable heir (TX-04).

7. Edge cases that catch this wiki’s readers

• A non-citizen spouse gets no unlimited marital deduction. ✅ Instead there is an annual gift exclusion of $194,000 for 2026 ✅ (up from $190,000 in 2025), and transfers at death need a qualified domestic trust (QDOT) to defer the tax. This catches mixed-nationality couples who assume the marital deduction is automatic — it is not, and the default is a taxable transfer at the first death.
• Nonresident non-citizens get a federal estate exemption of roughly $60,000 ◻️, not $15,000,000, on their U.S.-situs assets — which includes U.S. real estate and, generally, U.S. company shares. Relevant to anyone who has expatriated or whose heirs have.
• Moving does not always move the tax. Real property is taxed where it sits, so keeping the old house creates a filing obligation in the old state ◻️. Establish domicile properly (ST-03) and deal with the real estate separately.
• Portability and the credit shelter serve different masters. Federal portability is easy and usually enough; the state layer has no portability, so a couple in an estate-tax state needs the trust even though the federal system would not require it. This is the single most common planning gap in the $2–10M band.

Three Scenarios

A. The Oregon couple, $2.4M, no trust. Their entire estate is under the federal exemption twenty times over, so no one has ever mentioned estate tax to them. Oregon’s exemption is $1,000,000. Doing nothing exposes $1.4M at the second death; a credit-shelter trust shelters $1M of it. The whole problem is a drafting question in a state most people move to for the scenery. They also check whether their Portland rental would keep them in the Oregon net if they later move (ST-03).

B. The childless FIRE couple in Pennsylvania, leaving to a sibling and two nieces. Pennsylvania has no estate tax, so every ranking calls it friendly — and their heirs face 12% and 15% inheritance rates ✅. On a $2,000,000 estate that is roughly $250,000. The remedies are real but unglamorous: lifetime gifting under the $19,000 annual exclusion (Pennsylvania has no gift tax and no add-back beyond one year ◻️), charitable bequests, or relocating the domicile. Their beneficiary designations are worth more than their will.

C. The widow, three years out, who never filed a 706. Her husband died with $4M of unused federal exemption and the estate owed nothing, so the attorney closed it without filing. She is inside the five-year window of Rev. Proc. 2022-32 ✅ and can still elect portability — recovering up to $15,000,000 of shelter for a form. This is the highest-value item in this article per hour spent, and it expires.

💡 Pro-Tips

1. File the 706 at the first death even when nothing is owed. It is the cheapest insurance in estate planning, and Rev. Proc. 2022-32 gives you five years to fix having skipped it.
2. Price your estate against your state’s exemption, not the federal one. If the answer is “over,” you have a planning problem the federal system will never flag for you.
3. Ask specifically whether your documents use a credit-shelter or disclaimer trust. Many wills drafted after 2018 dropped bypass provisions as obsolete — true federally, wrong in 17 jurisdictions.
4. Check who owns your life insurance. If it is you, the death benefit is in your estate; an ILIT fixes it, but transfers have a three-year lookback ◻️, so do it early.
5. Gift cash and high-basis assets; bequeath the low-basis ones. The 47% break-even in §6 is the whole rule.
6. Leave the traditional IRA to charity and the taxable account to the kids, not the reverse — the IRA gets no step-up and carries income tax with it (TX-04).
7. If you are childless or leaving to non-lineal heirs, check the inheritance-tax class rates before anything else. It is the largest lever you have and it lives on a beneficiary form.
8. Re-read the plan after any move, remarriage, or death in the family — all three can silently invalidate the structure you paid for.

⚠️ Common Pitfalls

1. Assuming the $15M federal exemption means “no estate tax.” It means no federal estate tax; 17 jurisdictions disagree.
2. Letting everything pass outright to the surviving spouse in an estate-tax state — the default that costs $390,000 in §5.
3. Not filing Form 706 at the first death because no tax was due, and discovering the lost DSUE years later.
4. Assuming state portability exists because federal portability does. It essentially never does ◻️.
5. Gifting appreciated stock to reduce a state estate tax and handing the heirs a larger capital-gains bill than the tax avoided.
6. Owning your own life insurance and inflating the estate by the death benefit.
7. Treating the will as the plan when beneficiary designations on retirement accounts and insurance override it entirely (EP-01).
8. Forgetting the GST exemption is not portable and letting it die unused at the first death.
9. Keeping real property in the old state after moving and staying inside its estate tax net ◻️.
10. Assuming a non-citizen spouse gets the unlimited marital deduction. They do not — the QDOT exists precisely because of this.
11. Planning once and never revisiting. Washington moved its rate twice in thirteen months ✅; exemptions and rates are legislative, not physical, constants.

✅ Actionable Checklist

Diagnose (an afternoon)

• Total the gross estate including life insurance death benefits and retirement accounts at full value
• Compare it to your state’s exemption (ST-04 §2), not the federal one
• Identify your heirs’ relationship classes if you are in an inheritance-tax state
• If widowed within five years: confirm whether a Form 706 was filed — if not, act now (§3)

If you are over your state’s exemption

• Ask your attorney whether your documents contain a credit-shelter or disclaimer trust, by name
• Model the second-death tax assuming no portability
• Check who owns each life insurance policy
• Inventory taxable assets by embedded gain, and sort them into “gift” and “bequeath” per §6

If you are moving

• Compare the estate regimes of origin and destination before, not after (ST-02 line 5)
• Decide what happens to real property left behind (ST-03)

Every 2–3 years, and after any move, death, or remarriage

• Re-verify your state’s exemption and rates against ST-04
• Re-confirm beneficiary designations on every account and policy

State notes (→ ST-01, ST-04): This is the most state-determined topic in the wiki — the federal layer is nearly inert for this audience and the state layer decides everything. 12 states plus DC levy an estate tax; 5 levy an inheritance tax; Maryland levies both ✅, with exemptions from Oregon’s $1,000,000 to Connecticut’s federal-tracking figure (ST-04 §2.1). Washington sits at $3,000,000, now frozen — SB 6347 restored the 10%–20% rate schedule for deaths on or after July 1, 2026 and re-tied indexing to a discontinued CPI series ✅, so its exemption erodes in real terms every year. State-level portability is generally unavailable ◻️, which is what makes §5 the central section of this page. Inheritance-tax states tax by relationship class, so the identity of your heirs changes the bill more than the size of your estate (ST-04 §2.2). Connecticut is the only state with a gift tax; Minnesota adds back gifts made within three years of death ✅. Real property is taxed where it sits regardless of your domicile ◻️ — see ST-03 before assuming a move solved anything.

Sources & further reading (verified August 2026)

• IRC §§ 2001, 2010, 2056, 2505, 2601 — the estate, gift, and GST framework; § 2010(c)(5)(A) is the portability election
• Rev. Proc. 2022-32 — the simplified five-year late portability election, read directly for the required return language
• IRS Instructions for Form 706 — filing thresholds, the 9-month deadline and 6-month extension, and the portability election box
• IRS, “Frequently asked questions on gift taxes for nonresidents not citizens of the United States” — the non-citizen spouse annual exclusion series ($190,000 for 2025, $194,000 for 2026)
• Rev. Proc. 2025-32 and FN-02 §8 — the 2026 exemption, annual exclusion, and GST figures
• Washington DOR, estate tax and rate-table pages — the $3,000,000 frozen exclusion and the restored 10%–20% schedule
• Pennsylvania DOR — inheritance tax rates by relationship class; Connecticut OLR, Estate, Inheritance, and Gift Taxes in CT and Other States; Minnesota DOR, Taxable Gifts (the three-year add-back)
• ST-04 §2 for current state exemptions and membership lists; EP-01 for beneficiary designations, which override everything here; TX-04 for the income-tax side of inherited retirement accounts