Overview
Estate and inheritance taxes are frequently confused, and the confusion costs people real planning time. An estate tax is charged to the deceased's estate before assets are distributed; an inheritance tax is charged to the person receiving the assets. The federal government only has an estate tax — there is no federal inheritance tax — but a handful of states have their own estate or inheritance taxes with far lower exemption thresholds than the federal one.
Why It Matters
Most retirees will never owe federal estate tax — the exemption is enormous. But state-level estate and inheritance taxes are a different story: several states apply their own tax at exemption levels dramatically lower than the federal threshold, meaning a genuinely middle-class estate can owe state estate tax even though it owes nothing federally.
How It Works
- The federal estate and gift tax exemption is unified and portable between spouses — a surviving spouse can generally use any unused portion of their deceased spouse's exemption (the "DSUE," Deceased Spousal Unused Exclusion) in addition to their own, provided the estate files the necessary election.
- The annual gift exclusion lets you give money to any number of individuals each year without touching your lifetime exemption at all — a straightforward way to reduce a taxable estate over time if it's large enough to matter.
- A handful of states impose their own estate tax (with exemptions often in the $1–$7 million range, far below the federal level) or inheritance tax (which depends on the heir's relationship to the deceased — spouses and children are often exempt or taxed at lower rates than more distant relatives or unrelated heirs).
- Which state's rules apply depends on your state of domicile at death, and separately, where any real property you own is located — owning real estate in a state with its own estate tax can create exposure even if you're domiciled elsewhere.
2026 Key Numbers
- Federal estate and gift tax exemption: $15,000,000 per person for 2026 (made permanent under OBBBA, indexed for inflation going forward) — effectively $30 million for a married couple using portability.
- Annual gift tax exclusion: $19,000 per recipient for 2026 (a married couple can jointly give $38,000 to any one person without using any lifetime exemption).
- State-level estate/inheritance taxes vary significantly and are not indexed to the federal exemption — always check current-year rules for your specific state of domicile.
Common Mistakes
- Assuming that because your estate is well under the federal $15 million exemption, no estate planning or state-level tax review is needed
- Not filing the DSUE portability election on the first spouse's estate tax return, permanently losing access to their unused exemption
- Owning real property in a state with its own estate tax without accounting for that exposure in overall planning
- Confusing estate tax planning with probate avoidance — these are related but distinct goals requiring different tools (trusts, beneficiary designations, titling)
Sources
- IRS — Estate and Gift Tax FAQs (irs.gov)
- Charles Schwab — One Big Beautiful Bill Act Tax Cuts (estate/gift provisions)
- RGWM Insights — 2026 Tax Code Changes
This is general education, not personalized advice. Estate planning, especially involving state-level taxes and portability elections, should be done with an estate planning attorney, not from a general reference guide.