10.1 Estate Tax (Form 706)
Key Takeaways
- The 2025 federal estate tax exemption is $13,990,000 per individual ($27,980,000 for married couples using portability); OBBBA permanently raises this to $15,000,000 starting 2026
- Estate tax rates remain progressive 18%-40%, with 40% applying to taxable amounts over $1 million; GST exemption for 2025 is also $13,990,000
- Form 706 is due 9 months after the date of death, with a 6-month extension available by filing Form 4768
- The unlimited marital deduction applies to transfers to a surviving U.S. citizen spouse; non-citizen spouses require a QDOT to qualify
- Inherited assets receive a §1014 stepped-up basis to fair market value at death, eliminating capital gains on appreciation during the decedent's lifetime
The federal estate tax is a tax on the transfer of property at death. Unlike income tax, which taxes earnings, the estate tax applies to the value of assets a decedent leaves behind. For the 2025 tax year (tested on the Jul 2026 – Feb 2027 EA exam window), the estate tax exemption is $13,990,000 per person. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently raises this exemption to $15,000,000 starting in 2026.
Understanding the Estate Tax
The estate tax and gift tax work together as a unified transfer tax system. This means lifetime gifts and transfers at death share the same exemption amount. Any exemption used for lifetime gifts reduces the amount available at death.
Key 2025 Figures
| Item | 2025 Amount |
|---|---|
| Estate Tax Exemption | $13,990,000 per person |
| Married Couple (with portability) | $27,980,000 combined |
| Annual Gift Tax Exclusion | $19,000 per recipient |
| Generation-Skipping Transfer (GST) Exemption | $13,990,000 |
| Maximum Estate Tax Rate | 40% |
| 2026 OBBBA Exemption (future) | $15,000,000 per person (permanent) |
Who Must File Form 706?
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed for estates of decedents who were U.S. citizens or residents where the gross estate plus adjusted taxable gifts exceeds the filing threshold of $13,990,000 for 2025.
Important Exception: Even if the estate is below the threshold, Form 706 must be filed to elect portability of the deceased spousal unused exclusion (DSUE) amount.
Filing Deadline
- Due Date: 9 months after the date of death
- Extension: 6-month automatic extension available by filing Form 4768
- Late Filing Penalty: Failure to file may result in penalties of 5% per month (up to 25%)
Components of the Gross Estate
The gross estate includes all property owned or controlled by the decedent at death, valued at fair market value on the date of death (or alternate valuation date).
What's Included in the Gross Estate
| Category | Examples |
|---|---|
| Real Property | Primary residence, vacation homes, rental properties, land |
| Personal Property | Vehicles, jewelry, art, furniture, collectibles |
| Financial Assets | Bank accounts, stocks, bonds, mutual funds |
| Retirement Accounts | IRAs, 401(k)s, pensions, annuities |
| Life Insurance | Proceeds from policies owned by decedent or where decedent had incidents of ownership |
| Business Interests | Sole proprietorships, partnership interests, closely-held stock |
| Jointly Held Property | Full value if decedent provided consideration; 50% for spouses |
| Revocable Trusts | Property in trusts the decedent could revoke or control |
| Powers of Appointment | Property over which decedent held general power of appointment |
Life Insurance Special Rules
Life insurance proceeds are included in the gross estate if:
- The decedent owned the policy (held incidents of ownership), OR
- The proceeds are payable to the decedent's estate
EA Exam Tip: If the decedent transferred a life insurance policy within 3 years of death, the proceeds are still included in the gross estate under the 3-year rule.
Deductions from the Gross Estate
Several deductions reduce the gross estate to arrive at the taxable estate:
Major Deductions
| Deduction | Description |
|---|---|
| Marital Deduction | Unlimited deduction for property passing to surviving U.S. citizen spouse |
| Charitable Deduction | Unlimited deduction for bequests to qualified charities |
| Debts and Claims | Decedent's outstanding debts, mortgages, and valid claims |
| Funeral Expenses | Reasonable funeral and burial costs |
| Administrative Expenses | Executor fees, attorney fees, probate costs |
| State Death Taxes | Deduction for state estate or inheritance taxes paid |
Marital Deduction Requirements
The unlimited marital deduction requires:
- Property passes to surviving spouse
- Surviving spouse is a U.S. citizen (special rules apply for non-citizen spouses using QDOT; the 2025 annual exclusion for gifts to a non-citizen spouse is $190,000)
- Property passes in qualifying form (outright or qualifying trust)
Estate Tax Rate Table (2025)
The federal estate tax uses a progressive rate structure. Tax is calculated on the taxable estate amount:
| Taxable Amount | Tax Rate | Tax Calculation |
|---|---|---|
| $0 – $10,000 | 18% | 18% of amount |
| $10,001 – $20,000 | 20% | $1,800 + 20% of excess over $10,000 |
| $20,001 – $40,000 | 22% | $3,800 + 22% of excess over $20,000 |
| $40,001 – $60,000 | 24% | $8,200 + 24% of excess over $40,000 |
| $60,001 – $80,000 | 26% | $13,000 + 26% of excess over $60,000 |
| $80,001 – $100,000 | 28% | $18,200 + 28% of excess over $80,000 |
| $100,001 – $150,000 | 30% | $23,800 + 30% of excess over $100,000 |
| $150,001 – $250,000 | 32% | $38,800 + 32% of excess over $150,000 |
| $250,001 – $500,000 | 34% | $70,800 + 34% of excess over $250,000 |
| $500,001 – $750,000 | 37% | $155,800 + 37% of excess over $500,000 |
| $750,001 – $1,000,000 | 39% | $248,300 + 39% of excess over $750,000 |
| Over $1,000,000 | 40% | $345,800 + 40% of excess over $1,000,000 |
Note: The applicable credit effectively exempts the first $13,990,000 from tax in 2025.
Portability: Deceased Spousal Unused Exclusion (DSUE)
Portability allows a surviving spouse to use the deceased spouse's unused exemption amount, effectively doubling the exemption for married couples.
How Portability Works (2025 Example)
- First spouse dies in 2025 with a $5 million taxable estate
- Uses $5 million of the $13.99 million exemption
- DSUE Amount: $8.99 million unused
- Surviving spouse can add $8.99 million to their own exemption
- Surviving spouse's total exemption: $13.99M + $8.99M = $22.98 million
Electing Portability
- Must file Form 706 even if no tax is due
- Must file within the filing deadline (including extensions)
- Portability election is irrevocable once made
- Only the last deceased spouse's DSUE is available
EA Exam Tip: Portability is a critical planning tool. Always consider filing Form 706 to preserve the DSUE, even for smaller estates.
Step-Up in Basis vs. Carryover Basis
One of the most significant tax benefits of inherited property is the §1014 stepped-up basis:
Comparison
| Transfer Type | Basis Rule | Tax Benefit |
|---|---|---|
| Inheritance | Stepped-up to FMV at death (§1014) | Capital gains during decedent's life eliminated |
| Gift | Carryover (donor's) basis | Donor's capital gains transferred to recipient |
Step-Up Basis Example
- Decedent purchased stock for $10,000
- Stock worth $100,000 at death in 2025
- Heir's basis: $100,000 (stepped-up)
- If heir sells immediately: $0 capital gain
Why This Matters
The step-up in basis eliminates income tax on appreciation that occurred during the decedent's lifetime. This makes holding appreciated assets until death advantageous compared to gifting them during life.
OBBBA: Permanent $15 Million Exemption Starting 2026
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the estate tax exemption and that doubling had been scheduled to sunset after December 31, 2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, eliminated the sunset and permanently set the exemption at $15,000,000 per individual for decedents dying after December 31, 2025, indexed for inflation thereafter.
Comparison: 2025 vs. 2026+
| Item | 2025 (Current) | 2026+ (OBBBA Permanent) |
|---|---|---|
| Estate Tax Exemption | $13,990,000 | $15,000,000 (indexed) |
| Married Couple (with portability) | $27,980,000 | $30,000,000 |
| Top Estate Tax Rate | 40% | 40% (unchanged) |
EA Exam Note: The 2026-2027 EA exam tests 2025 law, so the $13,990,000 figure is the correct exemption to memorize. Understanding the OBBBA permanent change to $15M demonstrates comprehensive knowledge of post-2025 transfer-tax planning.
EA Exam Tips
- Memorize the 2025 exemption: $13,990,000 per person, $27,980,000 for married couples with portability
- GST exemption is the same: $13,990,000 for 2025
- Know what's included: Life insurance owned by decedent is in the gross estate
- Understand deductions: Marital and charitable deductions are unlimited; non-citizen spouse annual exclusion is $190,000 in 2025
- Filing deadline: 9 months after death, 6-month extension available via Form 4768
- Portability requires filing: Must file Form 706 to elect DSUE, even for small estates
- Step-up vs. carryover: Inherited property gets §1014 stepped-up basis; gifted property carries over donor's basis
- Rate structure: 40% maximum rate applies to taxable amounts over $1 million
- OBBBA future context: $15,000,000 exemption permanent starting 2026
For 2025, what is the federal estate tax exemption amount per individual?
A decedent owned a $500,000 life insurance policy payable to their adult child. The decedent died in 2025. Which statement is correct regarding the estate tax treatment?
A decedent purchased stock for $50,000 that was worth $200,000 at death in 2025. The heir sells the stock for $210,000 shortly after inheriting it. What is the heir's capital gain?