Estate Tax and Planning: What Families Need to Know

Filing & Brackets · NEW LAW 2025

The federal estate tax exemption rises to $15 million per person in 2026 under the OBBBA. Here's who actually owes estate tax, how the step-up in basis works, and key planning moves.

Most families will never owe federal estate tax — but estate planning still matters for everyone, because how you pass on assets affects the taxes your heirs pay. With the One Big Beautiful Bill Act raising the exemption to historic highs, here's what you need to know about estate tax, the all-important 'step-up in basis,' and the planning moves that protect your family.

Who Actually Owes Estate Tax

The federal estate tax only applies to very large estates. Under the OBBBA, the lifetime estate and gift tax exemption rises to $15 million per individual ($30 million for a married couple) beginning in 2026, indexed for inflation thereafter.

That means a married couple can pass roughly $30 million to heirs free of federal estate tax. Estates above the exemption are taxed at rates up to 40%. Because so few estates exceed these thresholds, fewer than 1% of estates owe any federal estate tax — but some states impose their own estate or inheritance taxes at much lower thresholds.

The Step-Up in Basis: The Most Valuable Rule

When you inherit an asset, its cost basis is 'stepped up' to its fair market value on the date of death. This is one of the most powerful provisions in the tax code.

Example: your parent bought stock for $50,000 that's worth $500,000 at death. If they had sold it, they'd owe capital gains tax on $450,000. But when you inherit it, your basis becomes $500,000 — so if you sell immediately, you owe no capital gains tax at all. The step-up wipes out a lifetime of appreciation. This is why holding appreciated assets until death is often better than gifting them during life.

Gifting During Your Lifetime

You can give away money during your life without using your lifetime exemption, up to the annual gift tax exclusion ($19,000 per recipient for 2025; a married couple can give $38,000 per recipient). Gifts above that amount don't trigger tax immediately — they simply count against your lifetime exemption and require filing a gift tax return (Form 709).

Direct payments of someone's tuition or medical bills (paid straight to the institution) are unlimited and don't count against any exclusion.

Tools for Larger Estates

Families with estates approaching the exemption use planning tools such as:

• Irrevocable trusts to remove assets from the taxable estate
• Spousal portability, which lets a surviving spouse use the deceased spouse's unused exemption (requires filing an estate tax return)
• Life insurance trusts to keep policy proceeds out of the estate
• Charitable trusts that provide income and reduce the taxable estate

These strategies are complex and must be set up correctly and in advance. Estate planning is one area where professional guidance is essential.

Frequently Asked Questions

How much can I leave to my heirs tax-free?

Under the OBBBA, the federal exemption rises to $15 million per person ($30 million per married couple) beginning in 2026, indexed for inflation. Most estates owe no federal estate tax, though some states impose their own.

Do my heirs pay income tax on what they inherit?

Generally no. Inheritances are not subject to income tax to the recipient. However, inherited traditional retirement accounts are taxable as the heir withdraws the money, and some states have inheritance taxes.

What is the step-up in basis?

When you inherit an appreciated asset, its cost basis resets to the fair market value at the date of death. This can eliminate capital gains tax on a lifetime of appreciation if the heir sells.

How much can I give as a gift without tax?

For 2025 you can give up to $19,000 per recipient per year ($38,000 for a married couple) with no gift tax and no filing. Larger gifts count against your lifetime exemption and require a gift tax return.

Should I gift assets now or leave them in my estate?

It depends. Because of the step-up in basis, holding highly appreciated assets until death can save more tax than gifting them during life. The right answer depends on the asset, your estate size, and your goals — a planning conversation is worthwhile.