Estate tax affects the transfer of wealth at death for large estates. Thanks to recent tax law changes, the federal estate tax exemption has been made permanent at historically high levels and indexed for inflation. Even so, state-level estate or inheritance taxes — with much lower exemptions — remain a relevant consideration for many retirees.
Understanding how the federal estate tax works — and how it interacts with state taxes and retirement planning — can help you make informed decisions about wealth transfer, gifting, and legacy planning.
Federal Estate Tax in 2026
As of 2026, the federal estate tax exemption has been codified as permanent and continues to be indexed for inflation. For 2026:
- Single individuals: roughly $15 million exemption;
- Married couples (with portability election): effectively $30 million exemption.
Amounts above these exemption levels are potentially subject to the federal estate tax, which can impose a top rate of 40% on the taxable portion of the estate.
Note for retirees: Many households fall well below these federal exemption thresholds today, but future growth in assets and changes in law can still make planning worth considering — particularly if your retirement planning involves concentrated wealth, closely held business interests, or high-basis assets that may appreciate significantly over time.
Estate Tax vs. Probate vs. Inheritance
It’s important to distinguish:
- Estate tax is paid by an estate on the value of its assets above the exemption threshold before distributions to heirs;
- Probate is a legal process for settling an estate and is not the same as the estate tax;
- Non-Probate Assets, such as IRAs, 401(k), Transfer on Death accounts, or Life Insurance may still be included in your taxable estate;
- Inheritance tax (where it exists) is imposed on beneficiaries after assets are distributed.
State Estate & Inheritance Taxes
Even if your estate is below the federal threshold, many states may still impose their own taxes with much lower exemption amounts. Examples (as of late 2025/early 2026):
| State | Estate Tax Exemption | Estate Tax? | Inheritance Tax? |
|---|---|---|---|
| Connecticut | ~$13.99M | Yes | No |
| Hawaii | ~$5.49M | Yes | No |
| Illinois | ~$4.0M | Yes | No |
| Maine | ~$7.0M | Yes | No |
| Maryland | ~$5.0M | Yes | Yes |
| Massachusetts | ~$2.0M | Yes | No |
| Minnesota | ~$3.0M | Yes | No |
| New York | ~$7.16M | Yes | No |
| Oregon | ~$1.0M | Yes | No |
| Rhode Island | ~$1.80M | Yes | No |
| Vermont | ~$5.0M | Yes | No |
| Inheritance only (e.g., Kentucky, Nebraska, New Jersey, Pennsylvania) | — | No | Yes |
Many other states do not impose either tax, but tax landscapes can change. Checking your own state’s rules is important.
For a detailed explanation of how retirement income and distributions interact with taxes overall, see our Retirement Tax Planning hub.
Ways to Reduce or Manage Future Estate Tax Liability
The following strategies — many of which also align with broader retirement income and tax planning — can help manage potential estate tax exposure:
1. Lifetime Gifting
Use the federal gift tax annual exclusion (indexed yearly) to transfer wealth gradually outside your estate. Gifts reduce the size of your taxable estate and can benefit heirs while you’re alive.
2. Charitable Giving & QCDs
Charitable gifts reduce your taxable estate and may also offer income tax benefits. Qualified Charitable Distributions (QCDs) from IRAs at age 70½+ can further support this approach. See our article on QCDs from your IRA for more.
3. Irrevocable Trusts
Irrevocable vehicles such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), and Generation-Skipping Trusts (GSTs) can transfer assets out of your taxable estate.
4. Family Limited Partnerships (FLPs)
An FLP can allow you to pass interests in family businesses or investments to heirs, often at a valuation discount for gift/estate tax purposes.
5. Shifting Asset Titling & Beneficiary Designations
Proper titling and beneficiary designations (e.g., TOD/199A, payable-on-death accounts) can help ensure assets pass outside probate and align with estate goals, though they don’t directly reduce estate taxes.
6. Roth Conversions
Converting traditional IRAs to Roth IRAs can reduce future taxable assets in your estate and leave heirs with tax-free accounts, potentially lowering overall tax burden. Note: This strategy involves paying income taxes now for potential estate tax benefits later.
7. State Residency Planning
Relocating to a state without estate or inheritance tax can remove that state tax exposure for your heirs (see list above). However, overall tax implications — including property and income taxes — should be part of the decision.
8. Trusts and Other Advanced Planning Tools
Beyond ILITs and GRATs, specialized trusts (e.g., Dynasty Trusts, Charitable Remainder Trusts) can further tailor how assets are preserved or transferred across generations.
Frequently Asked Questions (Retiree-Focused)
Q: Who pays estate tax — the estate or the heirs?
The estate generally pays any federal estate tax due before assets are distributed to beneficiaries. Inheritance taxes (in certain states) are paid by the beneficiaries on what they receive.
Q: Does leaving assets to a spouse avoid estate tax?
Yes. Transfers between spouses (if both are U.S. citizens) are usually fully exempt from federal estate tax under the unlimited marital deduction.
Q: Do retirement accounts count toward the estate tax?
Yes — Traditional IRAs, 401(k)s, and other pre-tax retirement accounts are included in the value of your taxable estate, even if they pass outside probate.
Q: Should I update my estate plan now even with high exemptions?
Yes. High exemptions don’t replace the need for thoughtful planning. Estate plans also govern incapacity, guardianship wishes, distribution timing, and beneficiary protections — issues independent of tax levels.
For how retirement income sequencing and taxes correlate in later life, see our Retirement Income Planning Hub.
Estate planning is not just about taxes — it’s about how your savings support you and your loved ones. If you’d like a planning-first discussion about how federal and state estate tax considerations fit into your long-term retirement goals, you’re welcome to Request an Introductory Conversation.
