Key Takeaways
- The federal estate tax applies only to the portion of an estate's value that exceeds the applicable exemption amount, not to the entire estate.
- Legislation enacted in 2025 raised the federal estate and gift tax exemption to $15 million per individual starting in 2026, with inflation adjustments in future years, replacing a scheduled reduction that would have taken effect otherwise.
- Married couples can generally combine exemptions, effectively doubling the amount that can pass free of federal estate tax with proper planning.
- State-level estate or inheritance taxes are separate from the federal exemption and vary significantly depending on where you live.
- Even with a higher exemption, business owners should keep planning, since a business's value can grow, and exemption amounts and tax law can both change again.
Introduction
The federal estate tax is a tax on the transfer of a person's assets at death, but it only applies once an estate's value exceeds a specific exemption threshold, and for most Americans, including many successful business owners, that threshold means no federal estate tax is owed at all. Understanding how works starts with understanding that exemption, because it determines whether an estate is exposed to this tax in the first place, and how much of it might be.
Legislation passed in 2025 permanently raised the estate tax exemption starting in 2026, which changed the planning picture for many business owners who had been preparing for a much lower threshold under prior law. Even so, "permanent" in tax law tends to mean "until Congress changes it again," which is exactly why estate tax exemption 2026 figures, and the strategies built around them, deserve regular review rather than a one-time look.
How Estate Tax Works, at a Basic Level
The federal estate tax is calculated on the value of everything a person owns at death, business interests, real estate, investment accounts, life insurance proceeds if owned personally, and other assets, minus allowable deductions, minus the applicable exemption amount. Only the value above the exemption is potentially subject to tax, at rates that scale with the size of the taxable amount.
This means an estate valued at or below the exemption owes no regardless of how large that number might sound in absolute terms. The tax is specifically designed to apply to the portion of wealth transfer above a defined threshold, not to smaller estates or to the value below that line.
Estate Tax vs. Gift Tax
The federal estate and gift tax exemption is unified, meaning gifts made during your lifetime and assets transferred at death both draw from the same overall exemption amount. Gifting assets during life, within annual exclusion limits or by using a portion of the lifetime exemption, is one of the primary ways business owners manage estate tax exposure well before death.
Estate Tax vs. Inheritance Tax
These are often confused but are different taxes. The federal estate tax is assessed against the estate itself before assets are distributed. Some states impose a separate inheritance tax, assessed against beneficiaries based on what they receive and their relationship to the deceased. Whether either applies to your situation depends heavily on the state where you live or own property.
The Estate Tax Exemption for 2026
Estate tax law changed meaningfully with legislation enacted in 2025. Under prior law, the higher exemption amount established by the 2017 Tax Cuts and Jobs Act was scheduled to expire at the end of 2025, which would have cut the exemption roughly in half starting in 2026. Instead, new legislation made a substantially higher exemption permanent starting in 2026, generally reported at $15 million per individual, or effectively up to $30 million for a married couple through portability, with future inflation adjustments built in.
This is a significant, if reported, figure, and specific exemption amounts and inflation adjustments should always be confirmed with a certified tax strategist or current IRS guidance, since these thresholds are set by statute and can be affected by future legislation.
Who Actually Has to Pay Estate Tax in 2026
Given the size of the current exemption, the federal estate tax reaches a relatively small percentage of estates, generally those with very substantial business holdings, real estate, or investment portfolios that, combined, exceed the exemption threshold. For most business owners, this means the may not currently apply directly to their estate, though that can change as a business grows in value or if the exemption is reduced by future legislation.
This is an important distinction: a higher exemption doesn't mean estate planning becomes unnecessary. It changes the specific tax exposure, but business owners still need planning for succession, asset protection, liquidity to cover any remaining tax liability, and clear instructions for how assets transfer.
State Estate and Inheritance Taxes
Several states impose their own estate or inheritance tax, often with exemption thresholds far lower than the federal amount. An estate that owes no federal estate tax could still owe state-level tax, depending on where the deceased lived or owned property. This makes location a meaningful factor in estate tax planning that's easy to overlook if you're only thinking about the federal threshold.
Why Business Owners Should Still Plan, Even With a Higher Exemption
Business Value Can Grow Past the Exemption
A business worth well under the exemption threshold today could be worth considerably more in ten or twenty years. Estate planning put in place while a business is smaller, including gifting strategies or valuation-based transfers, can lock in tax treatment on future growth that would be harder to achieve later.
Exemption Amounts Can Change Again
Tax law is not static. The exemption increase enacted in 2025 replaced a scheduled reduction, and a future Congress could adjust these thresholds again. Planning around current law without flexibility can leave a plan poorly suited to a different future exemption level.
Liquidity Still Matters
Even without a large bill, an estate can lack the liquid assets needed to cover expenses, debts, or a smaller state-level tax, especially when most of its value is tied up in an illiquid business. Life insurance and other liquidity planning remain relevant regardless of exemption size.
Non-Tax Reasons for Estate Planning Remain
Succession planning, asset protection, avoiding probate, and providing clear instructions for heirs are all valuable independent of whether federal estate tax applies. A higher exemption changes the tax math, not the need for a coordinated plan.
How to Approach Estate Tax Planning in 2026
- Get a current valuation of your estate, including business interests, to understand your actual exposure relative to current exemption amounts.
- Confirm your state's estate or inheritance tax rules, since these operate independently of the federal exemption.
- Build in flexibility, recognizing that exemption levels and tax law can change again in the future.
- Continue succession and liquidity planning, regardless of your current federal estate tax exposure.
- Review your plan periodically with a certified tax strategist, especially after significant business growth or major life changes.