Estate tax for investors

The federal estate tax is a tax on large estates transferred at death. The current exemption is nearly $13.61 million per person (2024), adjusted annually for inflation. Estates exceeding the exemption are taxed at 40%. For many investors, the primary estate tax concern is planning to use the exemption and potentially save taxes through portability and trust structures. Step-up in basis for heirs is a major tax benefit on inherited assets.

How estate tax works

You die with a $20 million estate in stock and real estate. Your exemption is $13.61 million. Taxable estate: $20 - $13.61 = $6.39 million.

Federal estate tax: $6.39 million × 40% = $2.556 million.

Your heirs receive $20 million - $2.556 million = $17.44 million.

This is in addition to any state estate tax (some states impose 0%-20% on large estates).

The exemption and portability

For 2024, each person can exempt $13.61 million. A married couple can exempt $27.22 million combined if they use portability—the surviving spouse can claim the deceased spouse’s unused exemption.

Without portability planning, the first spouse to die might waste their exemption.

The 2026 sunset

Current law allows the $13.61 million exemption through 2025. On January 1, 2026, absent congressional action, the exemption sunsets to roughly $7 million per person. This is a major planning cliff: estates expected to exceed $7 million should consider accelerating gratuitous transfers (gifts) or establishing trusts before 2026.

Step-up in basis benefit

The largest tax benefit for heirs is step-up in basis: inherited assets reset to fair market value at death, eliminating embedded capital gains taxes.

A $10 million stock position with $6 million in unrealized gains triggers zero income tax on inheritance. This is sometimes called the “step-up loophole” and is worth more to wealthy investors than the estate tax exemption itself.

Who pays estate tax?

Most investors do not pay estate tax. The $13.61 million exemption is large; only the wealthiest ~0.1% of estates pay it.

However, if your estate will exceed the exemption (or the 2026 sunsetted $7 million), planning is essential.

Planning tools

Portability: Surviving spouse claims deceased spouse’s unused exemption. Requires a return filing but no trust.

Trusts: Irrevocable trusts remove assets from your estate, reducing taxable estate. Life insurance trusts and grantor retained annuity trusts are common.

Charitable giving: Large charitable contributions reduce estate size. Charitable remainder trusts combine charitable giving with income to you.

Gifting: During life, you can give up to $18,000 per person annually (2024, adjusted for inflation) without using your exemption. Gifts above this use exemption.

State estate and inheritance taxes

About 20 states impose their own estate or inheritance taxes. Rates vary from 0% to 16%. Planning must account for both federal and state taxes.

Illinois and Pennsylvania have inheritance taxes on beneficiaries (not on the estate); other states have estate taxes on the estate itself.

Generation-skipping transfer tax

If you leave wealth to grandchildren (skipping your children), you may be subject to generation-skipping transfer (GST) tax at 40% (same as estate tax). GST planning is complex; consult a professional.

Contrast with income tax

Estate tax is separate from income tax. An executor does not pay income tax on the estate; heirs do not pay income tax on inheritance. However, income generated by the estate during administration is taxed to the estate (at high rates).

QDOT and QPRT structures

Qualified domestic trusts (QDOTs) and qualified personal residence trusts (QPRTs) are specialized estate planning tools. QDOT is for non-US-citizen spouses; QPRT allows you to live in a house while removing it from your estate. Both are complex.

IRS Form 706

If your estate is subject to estate tax, your executor files Form 706 (federal estate tax return) within nine months of death. This return can be complex; professional preparation is strongly recommended.

The looming 2026 cliff

The most urgent estate planning issue for wealthy investors today is the 2026 sunset. If legislation does not extend the exemption, it drops by roughly 50%. Investors with $10-15 million in net worth should consult an estate planning attorney by 2025 to plan gifting or trust strategies.

See also