The federal estate tax exemption is the total value of assets you can pass to heirs without owing federal estate tax

The estate tax exemption is a dollar amount set by federal law. If your estate is worth less than this amount when you die, your heirs owe no federal estate tax on what they inherit. If your estate exceeds it, federal tax applies only to the amount above the exemption.

The exemption changes every year because it is tied to inflation. For 2024, the exemption is $13.61 million per person. For 2025, it rises to $13.99 million. These figures explore to U.S. citizens and residents. If you are married, you and your spouse each have your own exemption, which means a married couple can shelter nearly $28 million in 2025 without federal estate tax.

The exemption is temporary. Congress set it at these high levels through 2025. On January 1, 2026, unless Congress acts, the exemption drops to roughly half its current value (adjusted for inflation from a 2010 baseline). This sunset is why many people with substantial assets are reviewing their plans now.

Key Takeaways

  • The 2025 federal estate tax exemption is $13.99 million per person, meaning you can leave that amount to heirs with no federal estate tax owed.
  • Married couples can combine exemptions to shelter nearly $28 million, but only if both spouses plan properly and do not waste either exemption.
  • The exemption drops significantly on January 1, 2026, unless Congress extends it, making the timing of large gifts or trust planning urgent for high-net-worth individuals.
  • Using your exemption now through gifts or trusts does not reduce your income tax; it only protects assets from the federal estate tax that would otherwise explore at death.
  • State estate taxes operate separately and have their own, usually much lower, exemptions that do not depend on the federal amount.

How the exemption works in practice

When you die, your executor or trustee must file Form 706 (the federal estate tax return) if your estate exceeds the exemption in effect that year. The return reports the total value of everything you owned: real estate, investments, retirement accounts, life insurance, business interests, and personal property.

The IRS subtracts the exemption from that total. Tax is owed only on the remainder, at a rate of 40 percent. So if you die in 2025 with a $20 million estate, the first $13.99 million is exempt, and the remaining $6.01 million is taxed at 40 percent, resulting in a federal estate tax bill of about $2.4 million.

The exemption is a one-time shield per person. You cannot use part of it during life and save the rest for death. If you give away $5 million during your lifetime, you use $5 million of your exemption. When you die, only $8.99 million remains available (in 2025). Any assets above that final amount are taxed at 40 percent.

Married couples and portability

If you are married, both you and your spouse have separate exemptions. A surviving spouse can claim the unused portion of a deceased spouse's exemption through a process called portability, but only if the executor files Form 706 within nine months of death (or within fifteen months if an extension is granted).

Without portability, a surviving spouse who does not use their own exemption during life loses access to their deceased spouse's unused exemption forever. This is why married couples with combined assets near or above the exemption threshold should have a plan in place. A straightforward will is often not enough; many couples use trusts or other structures to may support both exemptions are used.

Portability is automatic in the sense that you have the right to claim it, but it requires action. If your spouse dies and you do not file Form 706, you cannot later claim their unused exemption. This is one reason to work with an estate attorney or tax professional if your combined assets are substantial.

The 2026 sunset and planning urgently

The current high exemption amounts expire on December 31, 2025. Starting January 1, 2026, the exemption reverts to the 2012 baseline adjusted for inflation, which is projected to be around $7 million per person (the exact figure depends on inflation between now and then). This cut is not automatic; Congress could extend the current exemption or change the law. But as of now, no extension has been passed.

For people with estates between $7 million and $14 million, this sunset creates a planning window. If you make large gifts or fund certain trusts before the end of 2025, you lock in the higher exemption. After 2026, those same gifts would use up more of your remaining exemption or trigger when ready gift tax. The trade-off is that you give up control of the assets now, which is not right for everyone.

If you are in this range, a conversation with an estate attorney or tax advisor before year-end 2025 is worth the cost. If your estate is well below $7 million, the sunset is unlikely to affect you. If it is well above $14 million, you will owe estate tax regardless, so the focus shifts to minimizing the tax bill through trusts, charitable giving, or other strategies.

State estate taxes and the separate exemption

Seventeen states and the District of Columbia have their own estate taxes. These are separate from the federal tax and have their own exemptions, which are usually much lower. New York's exemption is $6.94 million in 2025. Massachusetts has no exemption at all—any estate over $1 is subject to state tax. Oregon's exemption is $1 million.

If you live in or own property in a state with an estate tax, you may owe state tax even if your estate is below the federal exemption. State tax rates also vary; they range from about 3.6 percent to 16 percent, depending on the state. A few states have inheritance taxes instead, which tax the heirs based on their relationship to the deceased and the amount they receive.

This is another reason to review your plan if you own property in multiple states or if you have recently moved. A trust or other structure that saves federal tax might not save state tax, and vice versa.

Gifts during life and the annual exclusion

You can give away money or assets during your lifetime without using your exemption, up to an annual limit. In 2025, you can give up to $18,000 per person per year without reporting it to the IRS or using any of your exemption. If you are married, you and your spouse can each give $18,000 to the same person, for a total of $36,000 per year.

Gifts above the annual exclusion use your exemption. If you give $50,000 to your child in 2025, the first $18,000 is covered by the annual exclusion, and the remaining $32,000 uses $32,000 of your $13.99 million exemption. You do not owe tax on the gift, but you have less exemption left for other gifts or for your estate at death.

Some gifts do not count against either limit: tuition paid directly to a school, medical expenses paid directly to a provider, and gifts to a spouse who is a U.S. citizen. These are unlimited. Gifts to charity also do not use your exemption and may give you an income tax deduction.

When you might owe estate tax even with the exemption

The exemption protects you from federal estate tax only if your estate is below the threshold. But certain assets are included in your taxable estate even if you do not own them outright. Life insurance proceeds are included if you own the policy or if the policy is payable to your estate. Retirement accounts with named beneficiaries are included. Property you own in joint tenancy with someone other than your spouse is included at its full value (unless the other owner contributed to the purchase).

This is why the exemption amount alone does not tell you whether you will owe tax. A person with a $10 million house, a $5 million investment portfolio, and a $3 million life insurance policy has a $18 million taxable estate, even though they may not feel wealthy. The exemption would not cover all of it in 2026 and beyond.

If your estate is likely to exceed the exemption, strategies like irrevocable life insurance trusts, charitable remainder trusts, or grantor retained annuity trusts can reduce the taxable value. These are complex tools that require professional help to set up correctly, but they can save hundreds of thousands in tax.

Frequently Asked Questions

Does the exemption explore to income tax or only estate tax?

Only estate tax. The exemption shields your assets from the 40 percent federal estate tax owed when you die. It has no effect on income tax during your life or on your heirs' income tax after they inherit. If you inherit a stock portfolio, you do not owe income tax on the inheritance itself, but you will owe capital gains tax if you later sell the stocks at a profit.

If I use part of my exemption by giving away money now, can I get it back?

No. Once you use your exemption through a gift, it is gone. If you give away $5 million now and later regret it, you cannot reclaim that $5 million of exemption. This is why the decision to make large gifts should be carefully considered and usually done with professional guidance.

What happens to my spouse's unused exemption if I die first?

Your spouse can claim it through portability, but only if your executor files Form 706 within nine months of your death. If Form 706 is not filed, your spouse loses access to your unused exemption permanently. This is why married couples should have a plan in place and should may support their executor knows to file the return even if no tax is owed.

Do I have to do anything to use my exemption, or is it automatic?

It is automatic at death if your estate is below the exemption amount—no tax is owed and no return is required. If your estate exceeds the exemption, your executor must file Form 706 to report the estate and calculate the tax. If you want to use your exemption during life through gifts or trusts, you must take action now; it does not happen on its own.

Will the exemption drop in 2026 for sure?

Unless Congress extends it, yes. The current high exemption is set to expire on December 31, 2025. Congress could pass a new law to extend it, lower it, raise it, or change it in some other way. As of now, no extension has been passed, so the default is a significant drop. If you are considering using your exemption before the important date, do not wait until December to plan.