Estate Tax Explained: Will Your Heirs Actually Owe?

The federal estate tax sounds scary, but it affects very few people — fewer than 0.1% of estates owe any federal estate tax. The real trap is state-level estate and inheritance taxes, which kick in at much lower thresholds. If you live in Oregon, your estate could owe state tax starting at $1 million.

Federal Estate Tax: The Basics

The federal estate tax applies to the transfer of property at death. For 2026, the exemption amount is $13.99 million per individual ($27.98 million for married couples). This means:

If your estate is worth less than $13.99 million, you owe zero federal estate tax.
If your estate exceeds $13.99 million, only the amount above the exemption is taxed — at rates up to 40%.
Married couples can effectively double the exemption using the portability election, which lets a surviving spouse use the deceased spouse's unused exemption.

Example: A $20 million estate

Amount above exemption: $20M - $13.99M = $6.01M
Estate tax (approximately): $6.01M × 40% = $2,404,000
Heirs receive: $20M - $2,404,000 = $17,596,000

The TCJA Sunset: What Changes in 2026

The Tax Cuts and Jobs Act of 2017 doubled the estate tax exemption. This higher exemption was originally set to sunset (revert to pre-2017 levels) on January 1, 2026. The exemption would have dropped to roughly $7-8 million.

However, as of mid-2026, the status of this sunset is uncertain — Congress has debated extending the higher exemption. Check current law before making estate planning decisions based on a specific exemption amount.

State Estate and Inheritance Taxes

This is where most people get caught. Seventeen states and DC have their own estate or inheritance taxes, and their exemptions are much lower:

Oregon: Estate tax starts at $1 million. Top rate: 16%.
Massachusetts: Estate tax starts at $2 million. Top rate: 16%.
Washington: Estate tax starts at $2.193 million. Top rate: 20%.
New York: Estate tax starts at $7.16 million. Top rate: 16%.
Illinois: Estate tax starts at $4 million. Top rate: 16%.
Hawaii: Estate tax starts at $5.49 million. Top rate: 20%.
Minnesota: Estate tax starts at $3 million. Top rate: 16%.

Note the difference between estate tax and inheritance tax: estate tax is paid by the estate before assets are distributed. Inheritance tax is paid by the person receiving the inheritance. Six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

What Counts Toward Your Estate?

Your taxable estate includes almost everything you own at death:

Real estate (including your primary residence)
Investment accounts (stocks, bonds, mutual funds)
Retirement accounts (401(k), IRA — these are also subject to income tax for heirs)
Bank accounts and cash
Business interests (LLC, S-corp, partnership shares)
Life insurance death benefit (if you own the policy)
Personal property (cars, jewelry, art, collectibles)

The life insurance point surprises people: if you own a policy on your own life, the death benefit is included in your estate. A $5 million policy on a $8 million estate creates a $13 million estate — potentially pushing you over the exemption. An irrevocable life insurance trust (ILIT) can remove the policy from your estate.

Reducing Your Estate Tax

Several strategies can reduce or eliminate estate tax:

Annual gift exclusion: In 2026, you can give up to $18,000 per person per year without using your lifetime exemption. A married couple can give $36,000 to each child. Over 10 years, that's $360,000 per child removed from your estate — tax-free.
Lifetime gifting: You can give more than the annual exclusion by using your lifetime exemption. Gifts above $18,000 per person per year reduce your estate tax exemption dollar-for-dollar.
Charitable bequests: Assets left to qualified charities are fully deductible from the estate. A $5 million charitable bequest on a $20 million estate reduces the taxable estate to $15 million.
Marital deduction: Assets left to a US citizen spouse are fully deductible — no estate tax on the first death. The tax is deferred until the second spouse dies.
Irrevocable trusts: Transferring assets to an irrevocable trust removes them from your estate. You lose control, but the assets (and their future appreciation) are no longer taxable.
Step-up in basis: When you die, your heirs get a stepped-up basis on inherited assets. If you bought stock for $100,000 and it's worth $1 million at your death, your heirs' basis is $1 million — they can sell it immediately with zero capital gains tax.

The step-up in basis trap

If you gift highly appreciated stock while alive (rather than at death), the recipient gets your original cost basis. Gift $1 million of stock you bought for $100,000, and the recipient owes capital gains tax on $900,000 when they sell. If they inherit it instead, they pay zero. For appreciated assets, it's often better to hold and bequeath rather than gift.

🏛️ Try our free Estate Tax Calculator

Our Estate Tax Calculator computes federal and state estate tax for 2026. Enter your assets, debts, and state — see exactly what your heirs might owe.

The Bottom Line

Federal estate tax only affects estates over $13.99 million (2026). Most people owe zero.
State estate taxes are the real trap — Oregon starts at $1 million.
Life insurance is included in your estate if you own the policy. Consider an ILIT.
Annual gifting ($18K/person/year) removes assets from your estate tax-free.
Hold highly appreciated assets until death to give heirs a stepped-up basis.

Disclaimer: This guide is for informational purposes only and does not constitute legal or tax advice. Estate tax laws change frequently. Consult an estate planning attorney or tax professional for your specific situation.