Estate taxes can significantly reduce what you leave to your heirs. Understanding how estate taxes work helps you plan to minimize them and maximize your legacy.
What Are Estate Taxes?
Definition
Estate Tax:
- Tax on transfer of assets at death
- Paid by estate (before distribution)
- Why: Tax on wealth transfer
Key Point: Estate tax is on the estate, not the heirs (though it reduces inheritance).
Who Pays
The Estate Pays:
- Before assets distributed
- Reduces inheritance
- Why: Estate is responsible
Example:
- Estate: $15 million
- Estate tax: $280,000
- Net to heirs: $14,720,000
Federal Estate Tax
The Exemption
2026 Exemption: $14,320,000 per person
Most Estates Don't Pay:
- Under exemption: No estate tax
- Why: High exemption
Example: $2 million estate
- No estate tax: Under exemption
The Rate
Estate Tax Rate: 40% (on amount above exemption)
Example:
- Estate: $20 million
- Exemption: $14,320,000
- Taxable: $5,680,000
- Tax: $2,272,000 (40% of $5,680,000)
What's Included in Estate
Everything You Own:
- Real estate
- Investments
- Retirement accounts
- Life insurance (if you own policy)
- Business interests
- Why: Comprehensive
Example:
- Home: $500,000
- Investments: $1,000,000
- IRAs: $2,000,000
- Life insurance: $500,000
- Total estate: $4,000,000
State Estate Taxes
States with Estate Tax
12 States + DC Have Estate Tax (2026):
- Connecticut
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- Washington D.C.
Exemptions Vary: Each state has own exemption (usually lower than federal)
State Exemptions
Examples (2026):
- Oregon: $1 million
- Massachusetts: $2 million
- New York: $6,940,000
- Why: Lower than federal
Impact: May pay state estate tax even if no federal tax
Example: $3 million estate in Oregon
- Federal: No tax (under exemption)
- Oregon: Tax on $2 million (above $1 million exemption)
Estate Tax Exemption
How It Works
Exemption Amount:
- $14,320,000 per person (2026)
- Can pass tax-free
- Why: Protects most estates
Example:
- Estate: $10 million
- No estate tax: Under exemption
Exemption Changes
Scheduled to Decrease:
- 2026: $14,320,000
- 2026 and beyond: May decrease
- Why: TCJA provisions sunset
Plan Accordingly: Exemption may decrease
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Portability
What It Is
Portability:
- Surviving spouse can use deceased spouse's unused exemption
- Why: Doubles exemption for couple
Example:
- Spouse 1 exemption: $14,320,000
- Spouse 2 exemption: $14,320,000
- Combined: $28,640,000
How to Elect
Must File Form 706:
- Estate tax return
- Elect portability
- Why: Required to elect
Even If No Tax Due: Must file to elect portability
The Benefit
Doubles Exemption:
- For married couples
- Why: Significant benefit
Example:
- Without portability: $14,320,000 exemption
- With portability: $28,640,000 exemption
- Benefit: $14,320,000 additional exemption
Strategies to Minimize Estate Taxes
Strategy 1: Use Exemption
Maximize Exemption:
- Use full exemption
- Plan distributions
- Why: Maximize tax-free transfer
Strategy 2: Gifting
Annual Gifts:
- $19,000 per recipient (2026)
- Reduces estate
- Why: Estate reduction
Lifetime Gifts:
- Above annual exclusion
- Uses lifetime exemption
- Why: Reduce estate
Strategy 3: Irrevocable Trusts
Remove from Estate:
- Irrevocable trust
- Assets not in estate
- Why: Estate tax reduction
Trade-off: Lose control
Strategy 4: Roth Conversions
Tax-Free for Heirs:
- Convert to Roth
- Heirs get tax-free
- Why: Better for heirs
Example:
- Traditional IRA: $1 million (heirs pay tax)
- Roth IRA: $1 million (heirs get tax-free)
- Better for heirs: No income tax
Strategy 5: Life Insurance Trusts
Remove from Estate:
- Irrevocable life insurance trust
- Policy not in estate
- Why: Estate tax reduction
Complex: Requires professional help
Estate Tax Planning
When to Plan
Start Early:
- Before estate tax becomes issue
- Why: More options
If Large Estate:
- Definitely plan
- Why: Significant tax savings
What to Consider
1. Estate Size:
- Current size
- Projected growth
- Why: Determine if planning needed
2. Exemption Use:
- Maximize exemption
- Portability
- Why: Tax-free transfer
3. State Taxes:
- State estate tax
- May apply to smaller estates
- Why: Consider state
4. Heir Planning:
- Who inherits
- How they inherit
- Why: Minimize taxes for heirs
Common Questions
Q: Do most people pay estate tax?
A: No, most estates are under the exemption ($14,320,000), so no federal estate tax. But some states have lower exemptions.
Q: Can I avoid estate tax?
A: Yes, through exemption, gifting, trusts, and other strategies. Most people don't need to worry due to high exemption.
Q: Does life insurance count in estate?
A: Yes, if you own the policy. But can be removed with irrevocable life insurance trust.
Q: Do retirement accounts count in estate?
A: Yes, all assets count, including retirement accounts.
Bottom Line
Retirement and estate taxes:
- Federal estate tax: 40% on amount above $14,320,000 exemption
- Most estates don't pay: Under exemption
- State estate taxes: Some states have estate tax with lower exemptions
- Portability: Surviving spouse can use deceased spouse's exemption
- Planning strategies: Gifting, trusts, Roth conversions
Key Takeaways:
- Federal estate tax: 40% on amount above $14,320,000 exemption
- Most estates don't pay: Under exemption
- State estate taxes: Some states have estate tax (lower exemptions)
- Portability: Surviving spouse can use deceased spouse's exemption
- Planning strategies: Gifting, trusts, Roth conversions
- Start planning early: If large estate
- Get professional help: Complex area
Action Steps:
- Understand estate tax (usually not an issue due to high exemption)
- Check state estate tax (may apply to smaller estates)
- Consider portability (for married couples)
- Plan if large estate (gifting, trusts, etc.)
- Consider Roth conversions (tax-free for heirs)
- Review beneficiaries (ensure correct)
- Get professional help if large estate
- Plan early (more options)
Remember: Estate taxes usually aren't an issue for most retirees due to the high federal exemption ($14,320,000). But some states have estate taxes with lower exemptions, so check your state. If you have a large estate, consider planning strategies like gifting, trusts, and Roth conversions. The key is understanding if estate taxes apply to your situation and planning accordingly.
