Federal Estate Tax
The federal estate tax is imposed on the taxable estate of a decedent. The tax is paid by the executor out of estate assets before distribution to heirs. Understanding how the estate tax is computed — and which assets are included or excluded — is fundamental to effective estate planning.
Step 1 — The Gross Estate
The starting point for computing the federal estate tax is the gross estate — the total fair market value of all property included in the estate for tax purposes at the date of death (or the alternate valuation date six months later, if elected). The gross estate is broader than the probate estate and includes:
- All property owned outright by the decedent (fee simple interests)
- The decedent’s share of jointly held property (proportionate share for tenants in common; for WROS, the entire value is included except to the extent the surviving joint tenant can prove their contribution)
- Life insurance death benefits where the decedent held any incident of ownership at death, or where the estate is named beneficiary
- Property over which the decedent held a general power of appointment
- Certain property transferred during life where the decedent retained an interest or control
- The decedent’s share of community property
- Annuity benefits payable after death attributable to the decedent’s contributions
- Retirement account balances (IRAs, 401(k)s) that remain at death
Step 2 — Deductions from the Gross Estate
Several deductions reduce the gross estate to arrive at the taxable estate:
- Debts of the decedent — mortgages, loans, unpaid bills
- Funeral and estate administration expenses — legal fees, executor commissions, court costs, appraisal fees
- Casualty and theft losses occurring during estate administration
- The unlimited marital deduction — all property passing to a surviving U.S. citizen spouse is fully deductible
- The charitable deduction — all property passing to qualifying charitable organizations is fully deductible
- State death taxes paid (as a deduction, not a credit, under current law)
Computing the Federal Estate Tax
The Unified Credit & Applicable Exclusion Amount
The most important element in the estate tax computation is the unified credit, which offsets the tentative tax dollar-for-dollar. The unified credit effectively shields a specified amount of wealth from estate tax — the applicable exclusion amount.
Because the gift and estate taxes are unified, taxable gifts made during life are added back to the estate tax base and the unified credit is applied to the combined total. Any credit used during life to offset gift tax reduces the credit available at death.
The Unlimited Marital Deduction
The unlimited marital deduction allows an unlimited amount of property to pass to a surviving U.S. citizen spouse free of estate tax. This deduction is the single most powerful estate tax reduction tool available for married couples. However, it merely defers the tax — assets passing to the surviving spouse under the marital deduction are included in the surviving spouse’s taxable estate at death.
The marital deduction applies to outright bequests and to certain forms of trust, including the Qualified Terminable Interest Property (QTIP) trust, which allows the deceased spouse to control the ultimate disposition of assets while still qualifying for the marital deduction.
The marital deduction is not available for non-citizen spouses. Instead, assets for non-citizen spouses must be placed in a Qualified Domestic Trust (QDOT) to defer estate tax.
Portability of the Unused Exclusion
Portability allows the estate of a surviving spouse to use any unused portion of a predeceased spouse’s applicable exclusion amount — called the Deceased Spousal Unused Exclusion (DSUE). Portability was made permanent by the American Taxpayer Relief Act of 2012.
To elect portability, the executor of the predeceased spouse’s estate must file a federal estate tax return (Form 706) within the filing deadline — even if no estate tax is owed. Without this election, the unused exclusion is permanently lost.
Example: Spouse A dies in 2024 with a $3.61 million taxable estate, using $3.61 million of the $13.61 million exclusion. The remaining $10 million DSUE is portable to Spouse B. If Spouse B timely elects portability, Spouse B’s total exclusion is $13.61M (own) + $10M (DSUE) = $23.61 million.
Important limitation: The DSUE amount is fixed at the predeceased spouse’s death and is not indexed for inflation. If the surviving spouse remarries and the new spouse predeceases, the DSUE from the first spouse is replaced by the DSUE from the most recent predeceased spouse.
The Charitable Deduction
An unlimited estate tax deduction is allowed for property passing to qualifying charitable organizations. This mirrors the gift tax charitable deduction. Charitable bequests may be made outright or through charitable trusts (charitable remainder trusts, charitable lead trusts), as discussed in Module 3.
Illustrative Computation
Example — Federal Estate Tax Computation
Note: This is a simplified illustration. Actual computations require a full Form 706 analysis. The unified credit figure represents the credit equivalent of the $13.61M exclusion at the 40% marginal rate.
Filing & Payment
The federal estate tax return (Form 706) is due nine months after the date of death, with a six-month extension available. The tax must generally be paid in full when the return is filed. In cases where the estate consists primarily of an interest in a closely held business, IRC §6166 permits installment payment of the estate tax attributable to that interest over up to 14 years (with a 5-year interest-only deferral period) — an important relief provision for family business owners.