“Legacy tax” isn’t a term found in the tax code. It’s a plain-English label people use for the federal estate tax and, in some states, inheritance taxes that apply when wealth moves from someone who has died to their heirs. For deaths in 2026, the federal exemption is $15 million per person, so fewer than 1 percent of estates owe anything to the IRS. Estates that clear that threshold face a top rate of 40 percent on the excess, and a handful of states add their own estate or inheritance tax on top, sometimes at exemptions far below the federal one.
Who Actually Owes It
The federal estate tax is a tax on the right to transfer property at death. It applies to the total value of the deceased person’s estate, not to individual inheritances received by heirs. The IRS starts with the gross estate, subtracts allowable deductions and the applicable exclusion, and taxes what remains at graduated rates running from 18 percent on the first $10,000 above the exemption up to 40 percent on amounts more than about $1 million above it.1Office of the Law Revision Counsel. 26 USC 2001 – Tax Imposed
For anyone dying in 2026, the estate must exceed $15 million in total value before any federal tax kicks in.2Internal Revenue Service. Estate Tax A married couple can shelter up to $30 million between them if they use portability correctly. For most families, that ends the conversation with the IRS. For those above the line, the bill can be substantial and the mechanics matter.
What Goes Into the Gross Estate
The gross estate includes almost everything the deceased owned or had an interest in at death: real estate, bank accounts, investment portfolios, retirement accounts, life insurance proceeds when the deceased owned the policy, business interests, vehicles, jewelry, art, and digital assets like cryptocurrency. Each item is valued at fair market value on the date of death, the price a willing buyer and willing seller would agree on with neither under pressure to act.3eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property
Publicly traded securities are simple. Private businesses and non-liquid interests require formal appraisals following the IRS framework.4Internal Revenue Service. Valuation of Assets Minority stakes and interests that can’t easily be sold often qualify for valuation discounts of 10 to 45 percent, which is why those appraisals get heavy scrutiny on audit.
If assets drop in value after death, the executor can elect to value the entire estate as of six months after the date of death instead. The election is all or nothing and only helps when the overall estate has declined.
Why Heirs Care About the Stepped-Up Basis
Even when no estate tax is owed, one feature of inherited property matters to every heir: the stepped-up basis. When you inherit an asset, your cost basis for income tax purposes resets to fair market value on the date of the decedent’s death, not whatever the deceased originally paid.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Say a parent bought stock for $50,000 that was worth $500,000 at death. Sold during their lifetime, the gain would have been $450,000. Inherited and sold the next day at the same price, the taxable gain is zero. The step-up erases a lifetime of unrealized appreciation and applies to real estate, stocks, business interests, and most other capital assets. In community property states, both halves of jointly owned marital property can receive a step-up at the first spouse’s death.
Traditional IRAs are the notable exception. Withdrawals from an inherited traditional IRA are taxed as ordinary income regardless of basis, and most non-spouse beneficiaries must empty the account within 10 years of the original owner’s death.
Deductions That Shrink the Taxable Estate
The gross estate is the starting number. Several deductions can dramatically reduce what’s actually taxed.
The Marital Deduction
Property passing to a surviving spouse who is a U.S. citizen is fully deductible with no dollar limit.6Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse A person with a $50 million estate who leaves everything to their citizen spouse owes zero at the first death. Those assets then sit in the survivor’s estate, so the deduction usually defers rather than eliminates the tax.
Charitable Bequests
Gifts at death to qualifying charities, religious organizations, educational institutions, and government entities are fully deductible with no cap.7Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
Debts and Administration Expenses
Outstanding mortgages, medical bills, funeral costs, attorney fees, executor commissions, appraisal costs, and court filing fees are all deductible. On large estates, administration expenses alone can knock hundreds of thousands off the taxable amount.
Portability: Don’t Leave the Second Exemption on the Table
When the first spouse dies without using their full $15 million exemption, the surviving spouse can claim the unused portion. This is called the deceased spousal unused exclusion, or DSUE, and it’s what lets a couple shelter up to $30 million.8Internal Revenue Service. Frequently Asked Questions on Estate Taxes
Portability isn’t automatic. The deceased spouse’s executor must file Form 706 and make the election, even if the estate is well below the filing threshold and owes no tax.2Internal Revenue Service. Estate Tax Skip it and the unused exemption is gone. For estates not otherwise required to file, Revenue Procedure 2022-32 provides a simplified five-year window from the date of death to file a late portability election. After five years, the door closes.
Filing, Deadlines, and Executor Risk
The executor must file Form 706 when the deceased was a U.S. citizen or resident and the gross estate plus lifetime taxable gifts exceeds $15 million.2Internal Revenue Service. Estate Tax A return is also required for a portability election regardless of estate size.
Form 706 is due nine months after the date of death.8Internal Revenue Service. Frequently Asked Questions on Estate Taxes An automatic six-month filing extension is available by submitting Form 4768 before the original deadline.9eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return The filing extension does not extend the time to pay. A payment extension must be requested separately on the same Form 4768, is granted only for reasonable cause, and runs one year at a time up to a maximum of 10 years.10Internal Revenue Service. Instructions for Form 4768
Executors take on a risk many don’t realize when they accept the job. A personal representative who distributes assets to heirs before satisfying the government’s claims becomes personally liable for the unpaid federal tax up to the amount distributed.11Office of the Law Revision Counsel. 31 USC 3713 – Priority of Government Claims The safe practice is to hold back enough cash until the IRS processes the return or issues a closing letter.
Paying When the Estate Is Illiquid
Any estate tax owed is due nine months after death. For estates heavy in real estate or a family business but short on cash, that’s the hardest part of the process.
Under IRC Section 6166, when a closely held business makes up more than 35 percent of the adjusted gross estate, the executor can elect to defer the tax attributable to the business interest. The estate pays interest only for the first five years and then spreads principal across up to 10 annual installments, stretching the payment window to roughly 14 years from the original due date.12Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business The IRS places a lien on the business assets during repayment.
Penalties and Interest
Missing the deadlines triggers two separate penalties. Failure-to-file runs 5 percent of the unpaid tax per month or partial month, capped at 25 percent.13Internal Revenue Service. Failure to File Penalty Failure-to-pay is 0.5 percent per month, also capped at 25 percent.14Internal Revenue Service. Failure to Pay Penalty When both apply in the same month, the failure-to-file amount is reduced by the failure-to-pay amount. Interest runs on top at the federal short-term rate plus 3 percentage points, compounded daily, from the original due date regardless of extensions.15Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest Penalties can be waived for reasonable cause with documentation. Interest cannot.
State Estate and Inheritance Taxes
The federal exemption is only half the story in some places. A number of states impose their own estate tax with exemptions well below $15 million, sometimes as low as $1 million. An estate that owes nothing federally can still face a meaningful state bill, with rates reaching 16 to 20 percent at the top brackets.
Five states impose an inheritance tax, which works differently: it’s levied on each beneficiary based on what that person receives, not on the estate as a whole. The five are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland alone imposes both an estate tax and an inheritance tax. Rates depend heavily on the heir’s relationship to the deceased. Spouses are typically exempt. Children and other close relatives pay lower rates or get higher exemptions. Unrelated beneficiaries can face rates of 15 to 16 percent. Executors handling assets or beneficiaries in more than one state should consult local counsel because the rules diverge sharply.
Trusts and Planning Tools
Trusts are the primary mechanism families use to manage estate tax exposure, and the type of trust matters.
A revocable (living) trust lets you keep full control during your lifetime, so everything in it remains part of your taxable estate at death. Revocable trusts help with probate and incapacity, not with estate tax.
An irrevocable trust permanently removes assets from your estate because you give up ownership and control. Any appreciation after the transfer happens outside your estate.
Several specialized irrevocable trusts target specific planning problems:
- A grantor retained annuity trust (GRAT) receives appreciating assets and pays you an annuity for a set term; growth above the IRS assumed rate passes to beneficiaries free of gift and estate tax.
- A qualified personal residence trust (QPRT) holds your home while you keep the right to live there for a fixed term, then passes the home to beneficiaries at a discounted gift value; if you outlive the term, the home is out of your estate entirely.
- An irrevocable life insurance trust (ILIT) owns the life insurance policy so the death benefit stays outside your estate, which is one of the most efficient ways to create liquidity for a tax bill without inflating the taxable estate.
Generation-Skipping Transfer Tax
The federal estate tax has a companion called the generation-skipping transfer tax, or GST tax. It targets transfers that skip a generation, such as a grandparent leaving assets directly to a grandchild or funding a trust for grandchildren.16Office of the Law Revision Counsel. 26 USC 2601 – Tax Imposed The rate is a flat 40 percent, and each person has a GST exemption equal to the estate tax exclusion, $15 million for 2026.17Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption Mistakes in allocating the exemption are expensive because the 40 percent GST sits on top of any estate tax already owed.
Non-Citizen Spouses and Nonresidents
The unlimited marital deduction does not apply when the surviving spouse is not a U.S. citizen.6Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse The workaround is a Qualified Domestic Trust (QDOT), which holds the inherited assets under a U.S. trustee and subjects distributions to deferred estate tax.18Internal Revenue Service. Instructions for Form 706-QDT Skipping QDOT planning can produce an immediate and avoidable tax bill at the first death.
A nonresident who is not a U.S. citizen but owns U.S.-situated assets (real estate, tangible personal property in the U.S., or stock in U.S. corporations) faces federal estate tax with an exemption of only $60,000. The executor files Form 706-NA instead of the standard Form 706.19Internal Revenue Service. About Form 706-NA A treaty between the U.S. and the decedent’s home country may raise the effective exemption or narrow which assets are taxable.
What Changed for 2026
The current $15 million exemption is a large increase from prior law. The 2017 Tax Cuts and Jobs Act roughly doubled the exemption from about $5.5 million to over $11 million per person, but that increase was set to expire at the end of 2025, which would have dropped the exemption back to roughly $5 million adjusted for inflation. The One Big Beautiful Bill Act, signed into law on July 4, 2025, made the higher exemption permanent and set the base at $15 million for 2026, with inflation adjustments in later years.20Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Anyone with an estate plan drafted between 2018 and 2025 should have it reviewed. Many were built to adapt to either a sunset or a permanent extension, and the assumptions inside the documents may no longer match the current rules.