Understanding the U.S. Federal Estate Tax (2025)
The federal estate tax applies to the transfer of property at death. Although only a small share of estates are taxable due to high exemptions, the impact for larger estates, family businesses, and cross-border families can be substantial. This page summarizes the current 2025 rules, expected changes after 2025, and practical strategies to reduce or avoid exposure, with direct references to IRS sources.
Key Rules for 2025
For 2025, estates of decedents have a basic exclusion amount of 13,990,000 USD and the annual gift exclusion is 19,000 USD per recipient. See IRS guidance here: IRS 2025 inflation adjustments (estate and gift).
- Basic exclusion (lifetime estate and gift tax exemption): 13,990,000 USD for decedents dying in 2025 (IRS 2025 announcement).
- Annual gift tax exclusion: 19,000 USD per recipient in 2025 (IRS What’s New — Estate & Gift and IRS Gifts & Inheritances FAQ).
- Top federal estate tax rate: 40% (see IRS Estate Tax overview).
- Filing: Form 706 (United States Estate Tax Return) is typically due nine months after death; see IRS About Form 706 and IRS Instructions for Form 706.
- Portability: a surviving spouse can claim the deceased spouse’s unused exclusion (DSUE) if a timely Form 706 is filed; see IRS Form 706 Instructions (portability).
What Happens After 2025
Under current law, the higher exclusion created by the 2017 Tax Cuts and Jobs Act applies through 2025 and is scheduled to revert in 2026 to the pre-2018 level (5 million USD) as adjusted for inflation. The IRS has confirmed that using today’s higher exemption will not harm estates after 2025 (the “anti-clawback” regulations). See: IRS final regulations: making large gifts now won’t harm estates after 2025 and Treasury/IRS explainer on BEA reversion in 2026.
State Estate and Inheritance Taxes
Several states impose separate estate or inheritance taxes, often with lower exemptions than federal rules. If you hold property or beneficiaries in such states, incorporate state-level thresholds into your plan. (State tax pages vary; consult official state sources.)
Strategies to Reduce or Avoid Federal Estate Tax
The following measures are commonly used to minimize taxable estates and shift future appreciation out of the estate while staying within IRS rules.
Annual exclusion gifts and lifetime exemption planning
- Use the 19,000 USD annual exclusion per donee to transfer value each year without tapping the lifetime exclusion (IRS Gifts & Inheritances FAQ).
- Consider larger lifetime gifts that use part of the basic exclusion to remove future growth from the estate (IRS anti-clawback regulations).
- Note special limits for gifts to a non-citizen spouse (marital deduction cap updated annually); see IRS gift tax FAQs for nonresidents/non-citizens.
Trust-based strategies
- Irrevocable trusts to move assets and their future appreciation outside the taxable estate.
- Grantor Retained Annuity Trusts (GRATs) to pass appreciation efficiently within set annuity terms.
- Irrevocable Life Insurance Trusts (ILITs) to keep policy proceeds out of the taxable estate.
- Revocable living trusts streamline administration and privacy (they do not by themselves reduce estate tax).
Charitable planning
- Charitable bequests are deductible for estate tax purposes (IRS Estate Tax overview).
- Techniques include charitable remainder trusts and private foundations to align philanthropy with tax reduction.
Family businesses and real estate
- Entity structures (e.g., FLP/LLC) and compliant valuation discounts, where appropriate.
- Section 6166 installment payments of estate tax for closely held businesses to preserve liquidity (see IRS Form 706 Instructions).
- Section 2032A special-use valuation for qualifying farms and certain business property (annual limits updated; see IRS Draft Instructions 2025 (Form 706)).
Married couples: portability and elections
- Elect portability on a timely filed Form 706 to preserve the deceased spouse’s unused exclusion (DSUE); see IRS Form 706 Instructions (portability).
- Even where no tax is due, filing to secure portability can be advantageous for future planning.
Compliance, Filing, and Deadlines
- Filing threshold depends on the year of death and total of the gross estate plus adjusted taxable gifts; see IRS Estate Tax FAQs.
- Form 706 is generally due nine months after death; extensions may be available: IRS About Form 706 and IRS Instructions for Form 706.
- Keep records for valuations, elections (e.g., portability), special-use valuation, and any Section 6166 installment applications.
Practical Takeaways
- Most estates avoid federal estate tax in 2025 due to the high basic exclusion amount, but state taxes and future changes matter.
- Consider a plan that combines lifetime gifts, trust structures, charitable techniques, and elections to manage exposure.
- Review plans before 2026 given the scheduled reversion of the exclusion under current law.
Next Steps
Need help preparing an estate tax return or designing a plan to reduce or avoid estate tax? Discuss your situation with our team. We assist with Form 706 filing, portability elections, valuation issues, and strategy design tailored to your family and assets.
This page is for general information only and is not legal or tax advice. Please consult your us about your specific circumstances.
Federal Estate Tax – Frequently Asked Questions
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The federal estate tax is imposed on the decedent’s taxable estate. The executor files and pays from estate assets before distributions to beneficiaries. See the IRS overview: IRS Estate Tax.
For 2025, the basic exclusion amount is 13,990,000 USD per person, with a top rate of 40 percent above the exclusion. Reference: IRS inflation adjustments for 2025.
The executor must file Form 706 if the gross estate plus adjusted taxable gifts exceed the filing threshold for the year of death, or to elect portability even if no tax is due. See: IRS About Form 706 and IRS Instructions for Form 706.
Form 706 is generally due nine months after death. An extension of time to file may be available, though extending time to pay may require a separate request. Guidance: IRS Form 706 Instructions.
Portability allows a surviving spouse to use the deceased spouse’s unused exclusion (DSUE). Election is made by timely filing Form 706, even if no tax is due. See: IRS Form 706 Instructions (portability).
Annual exclusion gifts (19,000 USD per recipient in 2025) remove value without using the lifetime exclusion, while larger lifetime gifts use the exclusion to shift future appreciation out of the taxable estate. See: IRS Gift Tax overview.
No, under current regulations, making large gifts while the exclusion is higher will not adversely affect estates after 2025. See: IRS final regulations on anti-clawback.
Nonresidents who are not U.S. citizens are generally taxed on U.S.-situs property with a much smaller exemption unless a treaty applies. See: IRS Estate Tax for Nonresidents.
The unlimited marital deduction generally requires the surviving spouse to be a U.S. citizen. Transfers to a non-citizen spouse may qualify if made to a QDOT. See: IRS Publication 559 (QDOT discussion) and IRS Form 706 Instructions.
Common deductions include funeral and administration expenses, debts and mortgages, casualty losses, the marital deduction, and the charitable deduction. Overview: IRS Estate Tax.
Section 6166 may allow installment payments of estate tax for certain closely held businesses, and Section 2032A may permit special-use valuation for qualifying farms/business property. Details: IRS Form 706 Instructions.
Executors may elect to value the estate six months after death (or date of disposition) if it reduces both the gross estate and total estate tax. Requirements and elections are described in: IRS Form 706 Instructions.
Irrevocable trusts can remove assets and future appreciation from the taxable estate. GRATs help shift growth efficiently; ILITs can exclude life insurance proceeds from the estate. Trust administration and reporting must comply with IRS rules noted throughout IRS Estate Tax.
Charitable bequests to qualified organizations are deductible from the taxable estate. Planned giving vehicles (e.g., CRTs) can align philanthropy with tax reduction. See the overview: IRS Estate Tax.
GST tax applies to transfers that skip a generation (e.g., to grandchildren) and has its own exemption. Planning often coordinates estate, gift, and GST exemptions. See: IRS GST Tax and IRS About Form 709.
Several states impose their own taxes with lower thresholds. A plan should account for both federal and state rules. State guidance is published by each state’s revenue department; federal context: IRS Estate Tax.
Estate tax treaties may modify U.S. taxation and credits for foreign death taxes. Executors should analyze situs, domicile, and treaty eligibility. The IRS provides general estate tax guidance here: IRS Estate Tax.
Maintain death certificates, appraisals, brokerage and bank statements, business valuations, debt schedules, expense records, elections (e.g., portability), and copies of all filed forms and extensions. Filing guidance: IRS About Form 706.
Late filing, missed portability election, unsupported valuations, incorrect situs or residency assumptions, and missing disclosures for lifetime gifts. Reference materials: IRS Form 706 Instructions and IRS Estate Tax FAQs.
Our team prepares estate tax returns (Form 706), advises on portability and elections, and designs strategies to reduce or avoid estate tax. For a confidential discussion: Contact TaxRep.
Need help with Form 706, portability, or planning strategies to reduce or avoid estate tax? Start a confidential consultation: Contact TaxRep.