Understanding the Federal Estate Tax
The federal estate tax is a tax on the transfer of property at death. It applies only to estates exceeding a substantial exemption threshold, which for 2026 is approximately $13.6 million per individual ($27.2 million per married couple). Only about 0.1% of estates are large enough to owe federal estate tax. For those who are subject to it, the top marginal rate is 40%. Understanding estate tax planning is important for high-net-worth individuals to preserve wealth for future generations.
The estate tax exemption has changed dramatically over the decades. The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption from $5.49 million to $11.18 million (adjusted for inflation). However, this increase is set to sunset after 2025, potentially dropping the exemption back to approximately $7 million per person. This creates urgency for estate planning to lock in the current higher exemption through gifting strategies.
After 2025, the estate tax exemption may revert to approximately $7 million per person (from $13.6 million). Individuals with estates between $7 million and $13.6 million should consider using the current higher exemption through gifting strategies before the potential sunset. Consult an estate planning attorney immediately if this applies to you.
Estate Tax Calculation
| Taxable Amount Over Exemption | Tax Rate |
|---|---|
| $0-$10,000 | 18% |
| $10,001-$20,000 | 20% |
| $20,001-$40,000 | 22% |
| $40,001-$60,000 | 24% |
| $60,001-$80,000 | 26% |
| $80,001-$100,000 | 28% |
| $100,001-$150,000 | 30% |
| $150,001-$250,000 | 32% |
| $250,001-$500,000 | 34% |
| $500,001-$750,000 | 37% |
| $750,001-$1,000,000 | 39% |
| Over $1,000,000 | 40% |
- 1Taxable estate: $15,000,000 - $200,000 - $0 = $14,800,000
- 2Estate above exemption: $14,800,000 - $13,600,000 = $1,200,000
- 3Estate tax on $1,200,000 (at graduated rates, ~40%): ~$469,800
- 4Effective rate: $469,800 / $15,000,000 = 3.1%
- 5Net to heirs: $15,000,000 - $200,000 - $469,800 = $14,330,200
Estate Planning Strategies
Reduce Your Estate Tax Liability
State Estate and Inheritance Taxes
- 12 states plus DC impose estate taxes with lower exemptions than federal (as low as $1 million in some states)
- 6 states impose inheritance taxes (tax on the recipient rather than the estate)
- Maryland is the only state that imposes both estate and inheritance taxes
- States with estate taxes include: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and DC
- State estate tax rates range from 0.8% to 20%
- Inheritance tax states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania
Canadian Estate Taxation
Canada has no estate tax or inheritance tax. Instead, the Canadian tax system treats death as a deemed disposition, meaning all assets are considered sold at fair market value at the time of death, and capital gains tax applies on any unrealized gains. The principal residence is exempt from capital gains. Assets can be transferred to a surviving spouse on a tax-deferred rollover basis, deferring capital gains until the surviving spouse's death. Probate fees (0.5-1.5% of estate value depending on province) are charged in most provinces. Estate planning in Canada focuses on minimizing deemed disposition taxes and probate fees through strategies like joint ownership, beneficiary designations, and inter vivos trusts.
Estate planning is not just for the wealthy. Everyone should have a will, power of attorney, healthcare directive, and properly designated beneficiaries on retirement accounts and insurance policies. Without a will, your state's intestacy laws determine how your assets are distributed, which may not match your wishes. Consult an estate planning attorney to create a comprehensive plan.