Navigating Estate and Inheritance Taxes: Expert Answers to Key Reader Questions

Planning for the future of one’s estate requires careful attention to a shifting landscape of federal and state regulations. As tax laws evolve, individuals are increasingly seeking clarity on how their wealth will be treated upon death, how much the federal government will exempt, and whether state-level levies will diminish their legacies.

In this installment of Ask the Tax Editor, Joy Taylor, editor of The Kiplinger Tax Letter, addresses four prominent reader inquiries regarding federal and state estate taxes, inheritance rules, and the frequency with which Americans actually pay these taxes.

Main Facts

The federal estate and gift tax landscape is defined by substantial exemptions that shield the vast majority of Americans from federal death taxes. For individuals dying in 2026, the lifetime federal estate and gift tax exemption is set at a robust $15 million. This figure is indexed to adjust annually for inflation, meaning the threshold will continue to rise in subsequent years.

Despite the high exemption limits, a distinct web of state-level taxes remains active across the United States. While the federal government targets only the largest estates, a select group of states levies their own estate or inheritance taxes with thresholds far below the federal standard.

Furthermore, fundamental rules govern how inheritances are treated by the IRS. Inherited assets—including appreciated real property—are generally free from federal income tax upon receipt, and beneficiaries typically benefit from a "stepped-up" basis that minimizes capital gains taxes if the property is sold shortly after the owner’s death.

Chronology and Legislative Context

The timeline governing estate tax exemptions has undergone dramatic structural shifts over recent decades, largely driven by major federal tax overhauls:

• Pre-2018 Framework: Federal estate tax exemptions were significantly lower, capturing a much wider swath of middle-to-upper-middle-class estates.
• The Tax Cuts and Jobs Act (TCJA) of 2017: This landmark legislation effectively doubled the lifetime exemption amount, adjusting it for inflation annually.
• The 2026 Threshold: For decedents passing away in 2026, the lifetime federal estate and gift tax exemption officially reaches $15 million. This threshold is scheduled to scale upward with future inflation adjustments, though policymakers continue to debate the long-term trajectory of these thresholds.
• State-Level Divergence: Over the years, while the federal government steadily increased its exemption, many states decoupled their estate tax laws from the federal standard. Consequently, numerous jurisdictions retained much lower exemptions, creating a fragmented environment where families may owe state-level death taxes even if their total wealth falls well below the federal $15 million threshold.

Supporting Data and IRS Statistics

To understand the practical impact of federal estate taxes, it is helpful to examine how many estates actually trigger a tax liability under the current high exemption limits.

According to historical IRS data, roughly 7,000 Form 706 estate tax returns are filed annually. However, only a fraction of those filings result in actual tax liability. Projections from the nonpartisan Tax Policy Center illustrate the modern scope of federal estate taxation:

• Total Projected Filings (2026): Approximately 6,890 federal estate tax returns are expected to be filed for decedents dying in 2026.
• Taxable Estates: Of those filings, roughly 3,900 estates are projected to owe federal estate tax.
• Non-Taxable Estates: The remaining 2,990 filings are expected to come from estates that file paperwork for administrative or compliance reasons but ultimately owe zero federal estate tax due to the high exemption limit.

When examining state-level burdens, the disparity becomes even more pronounced:

• Estate Tax States: Washington, D.C., and 12 states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington) levy their own estate taxes. With the exception of Connecticut—which has adjusted its exemption to closely mirror federal levels—the remaining jurisdictions enforce exemptions that are a fraction of the federal $15 million cap.
• Inheritance Tax States: Five states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose an inheritance tax, which is levied directly on the beneficiary receiving the assets rather than on the estate itself.

Official Responses and Expert Analysis

In her weekly Q&A feature, Joy Taylor provided detailed breakdowns for four specific questions submitted by readers. Below are the official responses and the comprehensive context surrounding each inquiry.

1. What’s the Lifetime Federal Estate and Gift Tax Exemption?

• The Question: What is the lifetime federal estate and gift tax exemption for people who die this year? Will it be different for 2027 deaths?
• The Expert Response: The lifetime federal estate and gift tax exemption for individuals dying in 2026 is $15 million. This amount is designed to increase incrementally each year to account for inflation. Official figures regarding the exact exemption threshold for deaths occurring in 2027 have not yet been finalized, as they depend on forthcoming inflation indexing calculations by the IRS.

2. How Many Estates Pay Federal Estate Tax?

• The Question: I’m curious how many estates actually pay estate tax, now that there is such a high lifetime federal estate and gift tax exemption.
• The Expert Response: In recent years, the IRS has processed roughly 7,000 Form 706 estate tax returns annually. Interestingly, more than half of these filings originate from taxable estates—those with assets exceeding the exemption threshold that actually owe federal tax. For decedents dying in 2026, the Tax Policy Center estimates that 6,890 total returns will be filed, with 3,900 coming from taxable estates and 2,990 originating from estates that owe no federal tax.

3. Will the IRS Tax Me on Inherited Property?

• The Question: My grandmother recently died, and I inherited an appreciated, valuable piece of real property that she owned. Will the IRS tax me on my inheritance?
• The Expert Response: Generally, inheritances are completely tax-free for federal income tax purposes when received. Furthermore, beneficiaries typically receive a "stepped-up" tax basis in inherited assets. This means the property’s tax basis is adjusted to its fair market value on the exact date of the decedent’s death. Consequently, if a beneficiary decides to sell the inherited real estate shortly after the passing of their loved one, they typically will not recognize a substantial taxable capital gain from the transaction.

4. Which States Have Their Own Estate and Inheritance Taxes?

• The Question: Which states have their own estate or inheritance taxes?
• The Expert Response: While the vast majority of U.S. states do not levy taxes upon a resident’s death, a minority of jurisdictions maintain their own tax regimes. Washington, D.C., alongside 12 states—Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington—levies an estate tax.

These local exemption limits vary dramatically and usually sit far below the federal benchmark, meaning state-level taxes can catch families by surprise. Only Connecticut has raised its state estate exemption to approach current federal levels. Additionally, five states—Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose an inheritance tax on the person receiving the assets.

Implications for Estate Planners and Families

The interaction between federal and state tax laws carries profound implications for financial planning and wealth transfer.

1. Shifting Federal Strategies: With a $15 million federal exemption for 2026, the vast majority of families will not face a federal tax bill upon a relative’s death. However, because tax laws are subject to legislative adjustments and future sunset provisions, individuals with substantial net worths must remain vigilant regarding inflation adjustments and potential legislative changes.
2. The State-Level Trap: The most common pitfall for families is assuming that state tax laws mirror federal regulations. An estate valued at $8 million may be entirely exempt from federal taxation, yet it could face aggressive taxation in states like Oregon, Massachusetts, or New York, where state exemption limits are significantly lower.
3. Beneficiary Protections: The availability of the stepped-up basis remains one of the most vital wealth-preserving mechanisms in the U.S. tax code. Heirs inheriting appreciated real estate, stocks, or business interests are shielded from paying capital gains taxes on appreciation that occurred during the decedent’s lifetime, simplifying the transfer of generational wealth.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute independent financial, legal, or tax advice. Readers should consult with a qualified financial planner, tax advisor, or legal counsel regarding any specific questions or circumstances related to estate and inheritance planning.