Federal estate tax on the taxable estate.

How the federal estate tax works

The federal estate tax is a transfer tax on the value of assets passing from a decedent to heirs. It is calculated on the taxable estate, which is the gross estate reduced by allowable deductions: debts of the decedent, funeral and administration expenses, transfers to a surviving spouse (unlimited marital deduction), and transfers to qualified charities (unlimited charitable deduction). The taxable estate is then compared to the applicable exemption, and any excess is taxed at a top federal rate of 40%. The tax is due nine months after death, in cash, which is why liquidity planning matters for illiquid estates.

The unified exemption and current-law status

Each individual has a single unified exemption that covers both taxable gifts made during life and transfers at death. The exemption is indexed annually for inflation. The exemption doubled under the Tax Cuts and Jobs Act beginning in 2018 and, absent further legislation, was originally scheduled to sunset back to approximately half its current level after 2025. Estate tax law is a moving target: the practical rule is to verify the exemption figure applicable to the year of death or the year of a planned lifetime transfer, and to model both current-law and potential sunset-law scenarios for a client near the threshold.

The 40% top rate and how the schedule flattens

The federal estate tax uses a progressive rate schedule that ramps up to a 40% top marginal rate at approximately $1 million of taxable estate above the exemption. Because most taxable estates that exceed the current exemption exceed it by more than $1 million, the effective marginal rate on incremental taxable estate is 40%. That is the number the planning conversation should focus on: every dollar removed from the taxable estate through gifting, ILIT-held life insurance, charitable bequest, or structured transfer avoids a 40-cent federal cost.

Portability and the DSUE

A married couple has two exemptions available, but only if the surviving spouse claims the deceased spouse's unused exemption (DSUE) by timely filing a federal estate tax return (Form 706) on the first death, even if no tax is owed. Missing that filing permanently forfeits the DSUE. Because the second spouse's estate may grow significantly before their own death, and because tax law may change, 706 filing on the first spouse's death is a defensive move for essentially every married couple with meaningful assets, not only for currently taxable estates.

Unlimited marital and charitable deductions

Transfers to a US citizen spouse are fully deductible from the taxable estate. Transfers to qualified charities are fully deductible. Together these two deductions structure a large fraction of estate planning: the marital deduction defers estate tax until the surviving spouse's death, and the charitable deduction eliminates it on the charitable share. Charitable Remainder Trusts, Charitable Lead Trusts, and Donor Advised Funds are the vehicles that let a client realize the charitable deduction while retaining an income interest or family involvement.

Life insurance and the ILIT

Life insurance owned by the insured is included in the gross estate at the death benefit value, which can push an otherwise non-taxable estate over the exemption. An Irrevocable Life Insurance Trust (ILIT) owns the policy and holds the death benefit outside the estate. Structured correctly, the ILIT receives the tax-free death benefit and provides liquidity to the estate through loans or purchases of illiquid assets. This is one of the highest- leverage advanced planning moves available: a single insurance premium can protect a family business or real estate holding from a forced sale at exactly the wrong moment.

Lifetime gifting and the unified credit

Beyond the annual exclusion (currently indexed and available per donor per recipient per year without touching the exemption), taxable gifts above the annual exclusion consume the unified exemption. Gifting early moves both the gifted asset and its future appreciation out of the estate. That appreciation avoided is often the largest single number in a multi-generational plan. Grantor-retained annuity trusts, sales to intentionally defective grantor trusts, and family limited partnerships are structures used to accelerate this removal of appreciation while retaining varying degrees of control.

State and international layers

About a dozen states impose their own estate or inheritance tax, with exemptions that are often substantially lower than the federal figure. A federally non-taxable estate can still owe significant state tax. Non-US citizens and clients with foreign assets face additional layers (limited exemption for non-domiciliaries, treaty coordination, and reporting obligations). This calculator addresses only the federal picture. Coordinated planning with an estate attorney licensed in the client's state of domicile is standard.