Federal Estate Tax

Federal Estate Tax and Gift Tax: A Complete Guide for 2026

The federal estate tax and the federal gift tax are two sides of the same system, designed together to tax the transfer of wealth from one person to another. Understanding how they work, what exemptions apply, and how to plan around them is essential for anyone with a significant estate. In 2026, the federal unified credit is $15,000,000 per person, set permanently by the One Big Beautiful Bill Act signed July 4, 2025.

The federal estate tax is a tax on the transfer of property from a deceased person to their heirs and beneficiaries. It is calculated on the total value of everything you own at the time of your death, reduced by allowable deductions, and applied to the amount remaining above your applicable exemption.

Your gross estate includes every asset you own or control at death: personal property such as vehicles, artwork, jewelry, and household furnishings; liquid assets including bank accounts, brokerage accounts, and mutual funds; real estate; retirement accounts including IRAs and 401(k)s; business interests; and life insurance proceeds. Life insurance is a particularly important item to understand: while the beneficiary receives the death benefit income-tax free, the full proceeds are included in the decedent's gross estate for federal estate tax purposes if the decedent owned the policy or held any incidents of ownership over it at death.

Your taxable estate is your gross estate reduced by allowable deductions: funeral and burial expenses paid from the estate, debts owed at the time of death, the value of property passing to a surviving U.S. citizen spouse under the unlimited marital deduction, the value of property passing to qualifying charitable organizations, and state death taxes actually paid. The federal estate tax is calculated on what remains after those deductions.

Everything you own at death is part of your gross estate, including life insurance proceeds. The federal estate tax is not just for the ultra-wealthy; for families with significant real estate, retirement accounts, and life insurance, the gross estate can reach taxable levels more quickly than expected.

The federal gift tax is the estate tax's companion, and it exists for a simple reason: without it, anyone could avoid the estate tax by giving everything away before death. The gift tax applies to transfers of property you make during your lifetime, whether outright or in trust, that are not covered by an exclusion or deduction. It is calculated using the same rates and the same unified credit as the estate tax.

The estate tax and the gift tax are unified under a single lifetime exemption, known as the federal unified credit. Taxable gifts you make during your lifetime reduce the unified credit available at death. If you use $5,000,000 of your unified credit on taxable lifetime gifts, only $10,000,000 of the $15,000,000 credit remains to shelter your estate at death. Because the two taxes share one exemption, planning for the gift tax and the estate tax must be done together.

Not every gift is taxable. Several exclusions and deductions prevent routine gifts from eroding the unified credit. The most important of these are the annual gift tax exclusion, the unlimited marital deduction, and the educational and medical exclusions, each of which is described in detail below.

The federal unified credit is the cornerstone of federal estate and gift tax planning. In 2026, each individual has a unified credit of $15,000,000. The first $15,000,000 of transfers, whether made during lifetime as taxable gifts or at death as part of the taxable estate, is completely shielded from federal estate and gift tax. Transfers above $15,000,000 are subject to federal estate tax at rates up to 40%.

The $15,000,000 unified credit was permanently set by the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025. Prior to this legislation, the higher exemption was scheduled to sunset after 2025 and revert to approximately $7,000,000 per person. The OBBBA made the higher exemption permanent. From 2027 forward, the exemption is inflation-indexed, meaning it will increase annually to keep pace with inflation.

Because the federal exemption is portable between spouses, a married couple can effectively combine their unified credits to shelter up to $30,000,000 from federal estate tax, provided the portability election is timely made on the first spouse's federal estate tax return (Form 706) within nine months of the first death, or fifteen months with an extension. Portability allows the surviving spouse to use the deceased spouse's unused exemption at their own death without requiring a Credit Shelter Trust, though a Credit Shelter Trust provides additional protections that portability alone does not.

Federal Unified Credit in 2026 $15,000,000 per person $30,000,000 per married couple (with timely portability election) Permanently set by the One Big Beautiful Bill Act (P.L. 119-21, July 4, 2025) Inflation-indexed from 2027

Federal Estate & Gift Tax	2026 Amount / Rule
Unified Credit (per person)	$15,000,000 — permanent, set by OBBBA (P.L. 119-21)
Married Couple Combined	$30,000,000 with timely portability election on first spouse's return
Federal Estate Tax Rate	Up to 40% on estate value above the exemption
Portability	Yes — portable between spouses; election required on Form 706 within 9 months of first death (or 15 months with extension)
Annual Gift Tax Exclusion	$19,000 per recipient per year; $38,000 per recipient for married couples combining exclusions
Unlimited Marital Deduction	Unlimited transfers to U.S. citizen spouse during lifetime or at death, free of gift and estate tax
Educational / Medical Exclusion	Unlimited — direct payments to qualifying educational institutions (tuition) or medical providers
GST Tax Rate	40% — imposed separately on transfers to grandchildren and more remote descendants
GST Tax Exemption	$15,000,000 per person — same as unified credit; not portable between spouses
Inflation Indexing	$15,000,000 exemption inflation-indexed annually from 2027 forward

The unlimited marital deduction is one of the most powerful tools in federal estate and gift tax planning. It allows one spouse to transfer an unlimited amount of property to a U.S. citizen spouse, either during lifetime or at death, completely free of federal gift and estate tax. There is no cap on the amount that can be transferred; the deduction is truly unlimited for transfers between U.S. citizen spouses.

The marital deduction works by removing the transferred assets from the transferring spouse's taxable estate. The transfer is not taxed because it simply moves wealth from one spouse's estate to the other's; the combined marital wealth has not been reduced. The tax is deferred, not eliminated: when the surviving spouse eventually transfers those assets, whether during their lifetime or at their death, the federal estate or gift tax will apply to the extent the transfers exceed the surviving spouse's own exemption.

An important limitation applies to transfers to non-U.S.-citizen spouses. The unlimited marital deduction is not available for transfers to a spouse who is not a U.S. citizen. Special planning structures, including a Qualified Domestic Trust (QDOT), may be used to defer estate tax on transfers to a non-citizen surviving spouse, but the planning is more complex and the tax is not permanently eliminated.

The unlimited marital deduction defers estate tax; it does not eliminate it. When the surviving spouse eventually transfers the inherited assets, either as lifetime gifts or at death, those assets are subject to federal estate and gift tax with only the surviving spouse's own exemption to protect them. Using the marital deduction without additional planning can leave the entire combined estate exposed to tax at the second death.

Federal law allows the unused portion of the deceased spouse's federal unified credit to be transferred to the surviving spouse through a mechanism called portability. If Husband dies in 2026 with an estate of $5,000,000, leaving everything to Wife under the unlimited marital deduction, his $15,000,000 federal exemption goes entirely unused at his death. Without portability, that $10,000,000 of unused exemption would be permanently lost. With a timely portability election on Husband's estate tax return, Wife can add Husband's unused $10,000,000 to her own $15,000,000 exemption, giving her up to $25,000,000 of federal exemption at her death.

Portability is not automatic. The executor of the first spouse's estate must file a federal estate tax return (Form 706) and make the portability election even if no estate tax is owed at the first death. The election must be made within nine months of the first spouse's death, or within fifteen months if a timely extension is filed. Missing this deadline means the portability election is permanently lost.

Portability is a federal concept only. It does not apply to state estate taxes, including Vermont's. A married Vermont couple that relies on federal portability rather than a Credit Shelter Trust may protect themselves from federal estate tax at the second death but still face significant Vermont estate tax because Vermont's exemption is not portable. For Vermont families, a Credit Shelter Trust accomplishes what portability cannot.

Portability must be elected. It is not automatic. If the executor of the first spouse's estate does not file Form 706 and make the portability election within the required timeframe, the deceased spouse's unused federal exemption is permanently lost. This is one of the most consequential and most commonly missed deadlines in estate administration.

The annual gift tax exclusion allows every individual to give up to $19,000 to any number of recipients in 2026 without using any of their unified credit and without filing a gift tax return. A married couple can combine their annual exclusions and give $38,000 per recipient per year, gift-tax free, through a process called gift splitting. Annual exclusion gifts are one of the simplest and most consistent wealth transfer strategies available, particularly when used systematically over many years.

The annual exclusion applies per recipient, not in total. A grandparent with six grandchildren can give $19,000 to each of the six, transferring $114,000 per year entirely outside the estate tax system without touching the unified credit. Over ten years, that grandparent has transferred $1,140,000 to grandchildren with zero gift or estate tax, purely through systematic annual gifting.

Annual exclusion gifts to trusts require special care. A gift to a trust qualifies for the annual exclusion only if the trust includes provisions giving each beneficiary a temporary right to withdraw their share of the gift, known as a Crummey power. Without Crummey provisions, a gift to a trust is treated as a gift of a future interest and does not qualify for the annual exclusion. Properly drafted Crummey provisions are a standard feature of Irrevocable Life Insurance Trusts and other irrevocable trusts funded through annual gifting programs.

Annual contributions to 529 college savings plans may also qualify for a special five-year front-loading election. A donor can contribute up to five years' worth of annual exclusions in a single year, transferring up to $95,000 per beneficiary in 2026 (or $190,000 for a married couple) into a 529 plan without gift tax, provided no additional annual exclusion gifts are made to that beneficiary during the five-year period.

2026 Annual Gift Tax Exclusion $19,000 per recipient per year (individual) $38,000 per recipient per year (married couple combining exclusions) Unlimited — direct tuition payments to qualifying educational institutions Unlimited — direct payments to qualifying medical providers $95,000 per beneficiary — 529 five-year front-loading election (individual) $190,000 per beneficiary — 529 five-year front-loading election (married couple)

In addition to the annual exclusion, two categorical exclusions remove certain payments from the gift tax system entirely, regardless of amount. These are among the most powerful and underutilized tools in estate planning for families who want to support younger generations.

Direct payments to qualifying educational institutions for tuition are excluded from gift tax without limit. The payment must be made directly to the institution; a gift of money to a grandchild who then pays their own tuition does not qualify. The exclusion applies to tuition only; room, board, books, and other expenses do not qualify. There is no dollar limit on the exclusion; a grandparent paying $80,000 in annual college tuition directly to a university removes that entire amount from the estate and gift tax system with no exemption used.

Direct payments to qualifying medical providers for medical care are similarly excluded from gift tax without limit. The payment must be made directly to the provider, not reimbursed to the patient. Medical care includes diagnosis, treatment, and prevention of disease, as well as transportation primarily for medical care and insurance premiums for medical care.

A grandparent who pays tuition directly to a university, funds a 529 plan using the five-year front-loading election, and makes annual exclusion gifts to each grandchild can transfer hundreds of thousands of dollars per year entirely outside the federal gift and estate tax system without using any of their $15,000,000 unified credit.

The generation-skipping transfer (GST) tax is a separate federal tax imposed on transfers of wealth to beneficiaries who are two or more generations below the transferor, such as grandchildren and great-grandchildren. It was enacted to prevent wealthy families from avoiding estate tax at each generational level by transferring wealth directly to grandchildren, bypassing the children's generation.

The GST tax rate is 40%, the same as the top federal estate tax rate, and it applies in addition to any applicable gift or estate tax on the same transfer. A generation-skipping transfer that is also subject to estate tax at 40% and GST tax at 40% can dramatically compress the amount reaching the intended beneficiary. Without a GST trust, a transfer intended to benefit grandchildren can lose the majority of its value to combined transfer taxes.

Each individual has a GST tax exemption equal to their unified credit, $15,000,000 in 2026. Unlike the estate tax exemption, the GST tax exemption is not portable between spouses. Each spouse must use their own GST exemption through lifetime transfers or at death. A properly structured Generation-Skipping Transfer Trust, funded with the grantor's GST tax exemption, can hold assets for multiple generations with distributions to grandchildren and great-grandchildren free of GST tax for the trust's entire existence.

The following two examples illustrate the federal estate tax consequences of planning versus not planning for a married couple. In both examples, Husband (H) has a taxable estate of $16,000,000 and Wife (W) has assets in her own right worth $14,000,000, for a combined estate of $30,000,000.

EXAMPLE 1 — No Tax Planning	EXAMPLE 2 — Credit Shelter Trust
Husband (H) dies in 2026 Estate: $16,000,000	Husband (H) dies in 2026 Estate: $16,000,000
▼	▼
100% to Wife — unlimited marital deduction	$15,000,000 → Credit Shelter Trust $1,000,000 → to Wife outright
▼	▼
Wife now owns: $16M + $14M = $30,000,000	Trust shielded by H's $15M credit W's estate: $1M + $14M = $15,000,000
▼	▼
Wife dies Taxable estate: $30,000,000	Wife dies W's estate: $15,000,000
▼	▼
W's $15M credit shelters: $15,000,000 → tax-free $15,000,000 → EXPOSED to federal estate tax	W's $15M credit covers her entire estate: $15,000,000 → NO TAX Trust assets also pass tax-free
▼	▼
FEDERAL ESTATE TAX OWED ≈ $4,800,000 – $6,000,000+ H's $15M unified credit — PERMANENTLY WASTED	TOTAL FEDERAL ESTATE TAX: $0 $30,000,000 to children — TAX-FREE Both H & W unified credits fully used
2026 figures reflect the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, signed July 4, 2025). Federal unified credit: $15,000,000 per person, permanent and inflation-indexed from 2027. Federal estate tax rates up to 40% on the excess above the exemption. Not legal or tax advice. Consult a licensed attorney.

In Example 1, H's $15,000,000 federal unified credit is permanently wasted when everything passes outright to W under the unlimited marital deduction. At W's death, $15,000,000 of the combined estate is exposed to federal estate tax, producing an estimated tax bill of $4,800,000 to $6,000,000 or more.

In Example 2, H's $15,000,000 unified credit is used at the first death by directing that amount into a Credit Shelter Trust. W benefits from the trust during her lifetime; at her death, the trust assets pass to the children free of federal estate tax, shielded by H's credit. W's own $15,000,000 exemption covers her remaining estate. The result: $30,000,000 to the children with zero federal estate tax.

Note that while portability could also preserve H's unused federal exemption in this example, a Credit Shelter Trust provides additional benefits that portability does not: asset protection from the surviving spouse's creditors, certainty that the first spouse's chosen beneficiaries receive the assets, and protection in blended family situations where the surviving spouse might otherwise redirect the assets.

For individuals and couples whose estates exceed or are expected to exceed the federal unified credit, a range of planning strategies are available to reduce or eliminate federal estate tax. Each of the following strategies has a dedicated page on our website.

Credit Shelter Trust and QTIP Trust

The Credit Shelter Trust uses the first spouse's exemption at the first death rather than relying solely on portability, providing asset protection, blended family protection, and certainty alongside the estate tax benefit. A QTIP Trust provides income to the surviving spouse while protecting the principal for the first spouse's chosen beneficiaries at the survivor's death.

Spousal Limited Access Trust (SLAT)

A SLAT allows the donor spouse to transfer assets irrevocably out of both spouses' taxable estates using the federal gift tax exemption while the beneficiary spouse retains indirect access through trust distributions. SLATs are commonly used to lock in the benefit of today's unified credit permanently.

Intentionally Defective Grantor Trust (IDGT)

An IDGT removes assets and all future appreciation from the grantor's taxable estate while the grantor continues to pay income tax on the trust's earnings. Each income tax payment further reduces the estate without being treated as a taxable gift. In the installment sale structure, the grantor sells assets to the trust at the applicable federal rate, transferring all excess appreciation to beneficiaries without using the unified credit.

Irrevocable Life Insurance Trust (ILIT)

An ILIT removes life insurance proceeds from the insured's taxable estate, providing tax-free liquidity to pay federal estate taxes, fund buy-sell agreements, or provide for family members without adding to the taxable estate.

Grantor Retained Annuity Trust (GRAT)

A zeroed-out GRAT transfers appreciation above the IRS Section 7520 hurdle rate to beneficiaries free of gift and estate tax, with zero gift tax cost and no downside beyond legal fees if the assets underperform.

Qualified Personal Residence Trust (QPRT)

A QPRT transfers a primary residence or vacation home out of the taxable estate at a discounted gift tax cost. The grantor retains the right to live in the property for a defined term; all post-transfer appreciation passes to beneficiaries free of estate tax.

Charitable Trusts (CRT and CLT)

A Charitable Remainder Trust provides income to the grantor for a defined period with the remainder passing to charity, generating an income tax deduction and removing assets from the taxable estate. A Charitable Lead Trust provides income to charity first with the remainder passing to family at reduced transfer tax cost.

Generation-Skipping Transfer Trust (GST Trust)

A GST trust funded with the grantor's GST tax exemption holds assets for multiple generations, allowing distributions to grandchildren and more remote descendants free of the 40% GST tax throughout the trust's existence.

Family Limited Partnerships and LLCs

Restructuring family assets through an FLP or LLC can qualify minority interests for valuation discounts for lack of control and lack of marketability, allowing more value to be transferred through annual exclusion gifts and the unified credit than would be possible with outright transfers of the same assets.

What is the federal estate tax exemption in 2026?

The federal unified credit in 2026 is $15,000,000 per person, permanently set by the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025). The first $15,000,000 of each person's estate is completely shielded from federal estate tax. Estates above $15,000,000 owe federal estate tax on the excess at rates up to 40%. A married couple can combine their credits to shelter up to $30,000,000, provided the portability election is timely made on the first spouse's estate tax return. The exemption is inflation-indexed from 2027 forward.

What is portability and how do I preserve it?

Portability allows the surviving spouse to use the deceased spouse's unused federal unified credit at their own death. To preserve portability, the executor of the first spouse's estate must file Form 706 (federal estate tax return) and make the portability election within nine months of the first death, or fifteen months with a timely extension, even if no federal estate tax is owed at the first death. Missing this deadline permanently eliminates the portability benefit. Portability applies to the federal exemption only; it does not apply to state estate taxes including Vermont's.

Is the gift tax separate from the estate tax?

The gift tax and the estate tax are not separate systems; they share a single unified credit of $15,000,000 per person in 2026. Taxable gifts made during your lifetime reduce the credit available at death dollar for dollar. A person who makes $4,000,000 in taxable lifetime gifts has $11,000,000 of unified credit remaining at death. This unified structure means that estate tax planning and gift tax planning must be coordinated; each affects the other.

What is the annual gift tax exclusion and can I give more than that?

The annual gift tax exclusion in 2026 is $19,000 per recipient per year ($38,000 for a married couple combining exclusions). You can give up to this amount to any number of people each year without using any unified credit and without filing a gift tax return. You can give more than $19,000 to a single recipient in a year, but the excess above $19,000 is a taxable gift that reduces your remaining unified credit. Taxable gifts do not trigger immediate tax payment until the unified credit is exhausted; they simply reduce what remains to shelter the estate at death.

Does life insurance count as part of my taxable estate?

Yes, if you own the policy or hold any incidents of ownership at the time of your death. Life insurance proceeds received by the beneficiary are income-tax free, but the full death benefit is included in the decedent's gross estate for federal estate tax purposes if the decedent owned the policy. Incidents of ownership include the right to change the beneficiary, the right to surrender the policy, and the right to borrow against it. Transferring your policy to an Irrevocable Life Insurance Trust (ILIT) removes the death benefit from your taxable estate, but the transfer is subject to the three-year lookback rule: if you die within three years of transferring an existing policy to an ILIT, the proceeds are pulled back into the estate.

What is the generation-skipping transfer tax and does it affect me?

The GST tax is a federal tax imposed at 40% on transfers to grandchildren and more remote descendants, in addition to any applicable estate or gift tax. Each person has a GST tax exemption of $15,000,000 in 2026, matching the unified credit. Unlike the estate tax exemption, the GST exemption is not portable. If you plan to leave significant assets to grandchildren, either directly or through a trust, GST tax planning is essential. A properly structured Generation-Skipping Transfer Trust, funded with your GST tax exemption, allows assets to benefit multiple generations without triggering GST tax at each level.

How is the federal estate tax calculated?

Federal estate tax is calculated on the taxable estate: the gross estate reduced by funeral expenses, debts, the unlimited marital deduction, the charitable deduction, and state death taxes paid. The unified credit of $15,000,000 is applied against the tentative tax on the taxable estate. If the taxable estate exceeds $15,000,000, the excess is subject to federal estate tax at rates up to 40%. Any taxable gifts made during the decedent's lifetime are added back to the estate for purposes of calculating the marginal rate but are not double-taxed; the gift tax previously paid or the exemption previously used is credited against the estate tax calculation.

At Will and Trust Planning, federal estate tax and gift tax planning is central to the comprehensive estate plans we prepare for families with significant assets. The federal unified credit is currently at a historically high level, and families who act now can lock in the benefit of that exemption permanently through properly structured irrevocable trusts and gift strategies.

Before we draft a single document, we sit down with you in a Peace of Mind Planning Session to analyze your federal and Vermont estate tax exposure, explain every available planning strategy in plain language, and build a coordinated plan that protects what you have built for the people and causes you care about most.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.

____________________________________________________________________________________