Estate Tax Planning

How the federal estate tax works

The calculation follows a fixed sequence:

• Gross estate — everything owned or controlled at death, including life insurance the decedent owned, retirement accounts and the decedent’s share of community property.
• Deductions — debts, expenses, property passing to a U.S. citizen spouse (the unlimited marital deduction) and to charity.
• Taxable estate — plus adjusted taxable gifts made during life.
• Exemption — the basic exclusion amount, $15 million per person in 2026, plus any unused exemption received from a deceased spouse.
• Tax — up to 40% on the amount above the exemption, with the return (Form 706) due nine months after death.

Portability for married couples

When the first spouse dies, the unused part of that spouse’s exemption — the deceased spousal unused exclusion amount — can pass to the survivor, but only if the executor files a timely estate tax return electing portability, even when no tax is due. The IRS allows a simplified late election within five years after death for estates that were not otherwise required to file (Revenue Procedure 2022-32). Portability does not carry over the generation-skipping transfer tax exemption, and the amount carried over is not indexed for inflation.

The marital deduction and non-citizen spouses

Property passing to a surviving spouse who is a U.S. citizen qualifies for an unlimited marital deduction, deferring tax until the survivor’s death. If the surviving spouse is not a U.S. citizen, the marital deduction is generally available only through a qualified domestic trust, or QDOT (Internal Revenue Code §2056A). Trusts that qualify for the deduction, such as QTIP trusts, let the first spouse to die decide who ultimately receives the property.

Lifetime gifts

Gifts up to the annual exclusion — $19,000 per recipient in 2026 — do not use any exemption. Larger gifts use the lifetime exemption, which is unified with the estate tax exemption. Giving removes future appreciation from the estate, but gifted property keeps the donor’s income tax basis, so the estate tax saved must be weighed against the capital gains heirs may later pay.

Irrevocable life insurance trusts

Life insurance owned by the insured is included in the gross estate. An irrevocable life insurance trust (ILIT) that owns the policy keeps the proceeds out of the estate and can provide cash to pay estate tax or to equalize inheritances. A policy transferred to the trust within three years before death is pulled back into the estate (Internal Revenue Code §2035), so new policies are usually purchased by the trust directly.

Advanced trusts for larger estates

Spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs), sales to intentionally defective grantor trusts and family limited partnerships can use the exemption efficiently or shift future growth to heirs. Each carries tax, control and family considerations, and California’s community property rules require care when one spouse makes gifts of community property.

Generation-skipping transfer tax

Gifts and bequests to grandchildren, or to trusts that last for several generations, can be subject to a separate generation-skipping transfer tax at a flat 40%. Each person has a GST exemption equal to the basic exclusion amount. Allocating the exemption to a long-term trust can keep the property outside the estate tax system for generations.

Property in other states

California has no estate tax, and neither does Nevada. Washington and Oregon impose their own estate taxes with much lower exemptions, and a Californian who owns real estate there can owe state estate tax on it. Holding out-of-state property through the right entity or trust can reduce that exposure.

Keeping the plan current

Exemptions and rates have changed many times. A plan written when the exemption was much lower may divide property into trusts that no longer save tax and may give up the step-up in basis at the second death. Review an estate tax plan whenever the law, your net worth or your family changes.