Estate tax (Form 706)

The federal estate tax is a tax on the transfer of property at death. It applies to the "taxable estate" — the fair market value of all assets owned at death minus allowable deductions, minus the applicable exemption.

52 steps across 12 sections

1. Gather Documentation

  • Death certificate
  • Will and any trust documents
  • Prior gift tax returns (Form 709)
  • Financial account statements as of date of death
  • Life insurance policies and beneficiary designations
  • Real estate deeds and mortgage statements
  • Business valuation reports
  • Records of debts and liabilities

2. Calculate Tax and Apply Credits

  • Calculate the tentative tax on the taxable estate using the rate schedule
  • Apply the unified credit ($15M exemption equivalent)
  • Apply any applicable credits (state death tax credit, credit for prior transfers, foreign death tax credit)
  • Result = net estate tax due

3. Current Law (2026)

  • Federal estate tax exemption: $15,000,000 per person ($30,000,000 for married couples)
  • Effective January 1, 2026
  • Indexed for inflation starting in 2027
  • No sunset provision — this is now permanent

4. How We Got Here

  • Pre-2018: The exemption was approximately $5.49 million per person (indexed for inflation from a $5M base set in 2010).
  • 2018-2025 (TCJA era): The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption. It rose from $11.18M in 2018 to $13.99M in 2025. However, the TCJA contained a sunset provision — these higher...
  • July 4, 2025 (One Big Beautiful Bill Act): The OBBBA was signed into law, permanently setting the exemption at $15 million per person starting in 2026, eliminating the TCJA sunset. This ended years...

5. Assets Included in Gross Estate

  • Real estate (primary residence, vacation homes, rental properties, land)
  • Bank accounts (checking, savings, CDs, money market)
  • Investment accounts (brokerage accounts, stocks, bonds, mutual funds)
  • Retirement accounts (IRAs, 401(k)s, pensions, annuities)
  • Business interests (sole proprietorships, partnerships, LLCs, S-corps, C-corps)
  • Life insurance proceeds if the decedent owned the policy or had incidents of ownership
  • Personal property (vehicles, jewelry, art, collectibles, furniture)
  • Trusts where the decedent retained certain powers or interests (revocable trusts, trusts with retained life estates)
  • Jointly held property (proportionate share or 100% if contributed all funds)
  • Powers of appointment (general powers over property)

6. Marital Deduction (Unlimited)

  • Applies to outright bequests, jointly held property, QTIP trusts, and general power of appointment trusts
  • Non-citizen spouses: Do NOT qualify for the unlimited marital deduction. Instead, a Qualified Domestic Trust (QDOT) must be used to defer estate tax
  • Strategic consideration: Taking the full marital deduction is not always optimal. It "wastes" the first spouse's exemption if portability is not elected or if state estate tax considerations apply

7. Charitable Deduction (Unlimited)

  • Includes bequests to 501(c)(3) organizations, charitable remainder trusts (CRTs), and charitable lead trusts (CLTs)
  • The charitable deduction is unlimited — theoretically, an estate can gift away the entire gross estate to charity and owe zero estate tax
  • Must be properly documented with the charity's tax-exempt status

8. Other Deductions

  • Debts and mortgages: Outstanding loans, credit card balances, mortgages on estate property
  • Funeral expenses: Costs of burial, cremation, headstone, etc.
  • Administrative expenses: Attorney fees, executor fees, appraiser fees, accounting fees, court costs
  • Casualty and theft losses occurring during estate administration (before the estate is settled)
  • State estate taxes paid (deductible on the federal return)

9. Key Rules

  • Portability is NOT automatic. It must be elected by filing a timely Form 706, even if no estate tax is owed
  • Available only between spouses (not available for the GST tax exemption)
  • The surviving spouse can use the DSUE for both lifetime gifts and transfers at death
  • If the surviving spouse remarries and the new spouse dies, the DSUE from the first deceased spouse may be lost (only the DSUE of the last deceased spouse is available)

10. Filing Deadline for Portability

  • Standard deadline: File Form 706 within 9 months of death (plus 6-month extension if requested)
  • Late portability election: The IRS allows a late portability election for up to 5 years after the decedent's death (extended from the previous 2-year window). This is filed using a simplified Form 706
  • This 5-year window provides important relief for surviving spouses who missed the original deadline

11. Simplified Portability Filing

  • Complete listing of all assets
  • Fair market value determinations
  • Proper identification of deductions

12. States with Inheritance Taxes

  • Iowa (being phased out)
  • Maryland (has BOTH estate and inheritance tax)

Common Mistakes

  • Failing to file for portability
  • Missing the deadline
  • Undervaluing assets
  • Forgetting to include all assets
  • Ignoring state estate tax

Pro Tips

  • Always file for portability
  • Get appraisals early
  • Consider a bypass (credit shelter) trust
  • Coordinate federal and state planning
  • Use the annual gift tax exclusion

Sources

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