IRS Publication 950 was the agency’s plain-language introduction to federal estate and gift taxes. The IRS retired the publication, but the underlying rules still govern how wealth transfers are taxed. For 2026, an individual can transfer up to $15 million during life or at death before any federal estate or gift tax applies, on top of a $19,000 annual exclusion per recipient, with a top rate of 40% on amounts above the exemption.1Internal Revenue Service. What’s New — Estate and Gift Tax The One, Big, Beautiful Bill Act, signed July 4, 2025, made the $15 million figure permanent and replaced a scheduled drop to roughly $7 million.
The $15 Million Lifetime Exemption
The estate tax and gift tax share a single lifetime exemption, called the basic exclusion amount. Every dollar used during life to cover a taxable gift is one less dollar available at death. For 2026 that pool is $15 million per person, indexed to inflation starting in 2027.2Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
The exemption works as a tax credit rather than a deduction. The IRS calculates what the tax would be on your cumulative lifetime taxable gifts plus your taxable estate, then subtracts the credit equivalent of $15 million. If the credit wipes out the calculated tax, nothing is owed. The rate applied above the exemption is a flat 40%.
The Annual Gift Exclusion
For 2026, you can give up to $19,000 to any number of people each year without reporting anything to the IRS and without touching your lifetime exemption.1Internal Revenue Service. What’s New — Estate and Gift Tax Give $19,000 each to ten people and you’ve moved $190,000 with no paperwork. The exclusion resets every January 1.
Anything above $19,000 to a single recipient in a year is a “taxable gift.” That label is less alarming than it sounds. You file Form 709, and the excess reduces your lifetime exemption. No tax is actually owed until the $15 million pool is exhausted.3Internal Revenue Service. Instructions for Form 709 (2025)
Gift Splitting Between Spouses
A married couple can effectively double the annual exclusion. If one spouse writes a $38,000 check to a family member, both spouses can elect to treat it as $19,000 from each, keeping the transfer within the exclusion.4Internal Revenue Service. Frequently Asked Questions on Gift Taxes Both spouses have to file Form 709 to make the election, even when only one wrote the check.
Transfers That Don’t Count at All
Certain payments escape the gift tax system entirely, no matter how large. Tuition paid directly to a school and medical bills paid directly to a healthcare provider both qualify.3Internal Revenue Service. Instructions for Form 709 (2025) The word “directly” carries weight. Hand the money to your grandchild so they can pay their own tuition and the exemption disappears.
Gifts to a U.S. citizen spouse are unlimited under the marital deduction.5Office of the Law Revision Counsel. 26 U.S. Code 2523 – Gift to Spouse If your spouse is not a U.S. citizen, a separate annual exclusion of $194,000 applies for 2026.6Internal Revenue Service. Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States
Front-Loading a 529 Plan
529 education plans allow a special election: you can contribute up to five years’ worth of annual exclusions in one shot. In 2026 that means one person can put $95,000 into a 529 for a single beneficiary, and a couple splitting the gift can contribute $190,000. The accelerated contribution goes on Form 709 and is spread across five years for gift tax purposes. During those five years, no further gifts to that beneficiary can be excluded under the annual exclusion.
What Counts in the Estate
At death, the federal estate tax reaches everything the decedent owned or had an interest in, tangible or intangible, wherever located.7Office of the Law Revision Counsel. 26 U.S.C. 2031 – Definition of Gross Estate Real estate, bank accounts, brokerage portfolios, vehicles, personal property — all valued at fair market value on the date of death.
The gross estate is broader than the probate estate. Life insurance proceeds are included if the decedent owned the policy or held incidents of ownership such as the right to change beneficiaries or borrow against it.8eCFR. 26 CFR 20.2042-1 – Proceeds of Life Insurance Retirement accounts, payable-on-death accounts, and revocable trusts follow the same pattern. For property held jointly by spouses, half the value is included in the first spouse’s estate.
Deductions From the Estate
The executor subtracts funeral costs, administrative expenses, debts, and unpaid mortgages to reach the taxable estate.9Office of the Law Revision Counsel. 26 U.S. Code 2053 – Expenses, Indebtedness, and Taxes Two other deductions do most of the work. The unlimited marital deduction removes the full value of anything passing to a U.S. citizen spouse, deferring estate tax until the second death.10Office of the Law Revision Counsel. 26 U.S. Code 2056 – Bequests, Etc., to Surviving Spouse The charitable deduction removes the full value of anything passing to qualifying charities or government entities.11Office of the Law Revision Counsel. 26 U.S. Code 2055 – Transfers for Public, Charitable, and Religious Uses Any state estate or inheritance tax actually paid is also deductible on the federal return.12Office of the Law Revision Counsel. 26 U.S. Code 2058 – State Death Taxes
The Step-Up in Basis
Heirs receive a valuable side benefit from having assets pass through an estate. Property inherited from a decedent takes a new tax basis equal to fair market value on the date of death, rather than the decedent’s original cost.13Internal Revenue Service. Gifts and Inheritances If a parent bought stock for $50,000 and it was worth $500,000 at death, the heir’s basis is $500,000. Sell the next day and the capital gains tax is zero. The step-up applies to all property included in the gross estate, whether or not any estate tax return is filed.
Portability Between Spouses
When the first spouse dies without using their entire exemption, the unused portion can transfer to the surviving spouse. This “deceased spousal unused exclusion” (DSUE) stacks on top of the survivor’s own $15 million, potentially shielding $30 million for a married couple in 2026.2Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
Portability is not automatic. The executor of the first spouse’s estate has to file a complete Form 706 and make the election on that return, even if the estate is far too small to owe any tax.14Internal Revenue Service. Instructions for Form 706 (09/2025) Skipping the filing because the estate looks “too small to bother” is a common and expensive mistake. If the standard nine-month deadline is missed, a simplified late-election procedure allows filing Form 706 up to five years after death, but only for estates that were not otherwise required to file.15Internal Revenue Service. Revenue Procedure 2022-32
Generation-Skipping Transfer Tax
A separate federal tax applies to transfers that skip a generation, such as gifts or bequests directly to grandchildren. The GST tax stops wealthy families from bypassing an entire layer of estate tax. It is imposed at a flat rate equal to the top estate tax rate, currently 40%.16Office of the Law Revision Counsel. 26 U.S.C. 2641 – Applicable Rate Each individual has a separate GST exemption equal to the basic exclusion amount, so $15 million for 2026.17Office of the Law Revision Counsel. 26 U.S.C. 2631 – GST Exemption The exemption is allocated to specific transfers, and once allocated, that allocation is irrevocable.
Filing Deadlines and the Two Forms
Two returns run the federal wealth transfer system, and their deadlines don’t align.
Form 709 is the gift tax return. You have to file it for any year in which you give more than $19,000 to a single person other than your U.S. citizen spouse, for any gift of a future interest regardless of value, and whenever you elect gift splitting with your spouse.3Internal Revenue Service. Instructions for Form 709 (2025) It’s due April 15 of the year after the gift. An extension on your personal income tax return automatically extends Form 709 to October 15.18Internal Revenue Service. Filing Estate and Gift Tax Returns Form 709 works as a running ledger. If you made $500,000 in taxable gifts over the past decade, your remaining lifetime exemption at death is $14.5 million, not $15 million.
Form 706 is the estate tax return. The executor must file when the gross estate plus adjusted taxable gifts exceeds the basic exclusion amount at death ($15 million for 2026), or whenever the executor wants to elect portability.14Internal Revenue Service. Instructions for Form 706 (09/2025) It’s due nine months after the date of death.19Office of the Law Revision Counsel. 26 U.S. Code 6075 – Time for Filing Estate and Gift Tax Returns Form 4768 gets an automatic six-month extension to file, but not to pay. Estimated tax is still due at the nine-month mark.
Estates where a closely held business exceeds 35% of the adjusted gross estate can elect to pay the estate tax in installments over up to ten years rather than in a lump sum, which can prevent a forced sale of the business.20Office of the Law Revision Counsel. 26 U.S.C. 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business The election has to be made on a timely filed Form 706.
Penalties If You Miss a Deadline
Missing a filing or payment deadline compounds fast. The failure-to-file penalty is 5% of the unpaid tax per month, capped at 25%.21Internal Revenue Service. Failure to File Penalty The failure-to-pay penalty is 0.5% per month, also capped at 25%.22Internal Revenue Service. Failure to Pay Penalty When both apply in the same month, the filing penalty is reduced so the combined hit stays at 5%. On a $2 million estate tax bill, that’s $100,000 in penalties for every month the return sits overdue. Interest runs on top. For the first quarter of 2026 the underpayment rate is 7% per year, compounded daily, and adjusts quarterly.23Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 Filing on time and requesting a payment plan cuts the monthly failure-to-pay penalty in half, to 0.25%.
State Estate and Inheritance Taxes
The $15 million federal exemption is not the whole picture. Twelve states and the District of Columbia impose their own estate taxes, and five states levy an inheritance tax. State exemption thresholds are often far below the federal number, starting as low as $1 million in some states, so families safely under the federal floor can still face a substantial state bill.
Estate taxes are paid by the estate before assets are distributed. Inheritance taxes are paid by each beneficiary based on what they receive and their relationship to the decedent. Close relatives typically get higher exemptions or lower rates; distant relatives and unrelated beneficiaries face the highest rates, which reach 16% in some states. Whatever the estate actually pays in state death tax comes back as a deduction on the federal return.12Office of the Law Revision Counsel. 26 U.S. Code 2058 – State Death Taxes