Estate Tax (Form 706)

by | Jun 17, 2026 | Individual Tax

Concise Takeaway

Federal transfer taxes apply to certain lifetime gifts, property owned at death, and transfers to younger generations. Most estates owe no estate tax because the applicable exclusion is very high, but Form 706 is required when the estate exceeds the filing threshold or when electing portability.

Gift, Estate, and GST Framework

Federal transfer taxes apply to:

  • Gifts made during life
  • Estates at death
  • Generation‑skipping transfers (GST) to individuals more than one generation below the donor

Most transfers to a spouse or charity are not taxable. The gift tax annual exclusion shields many lifetime gifts. Even when tax applies, the applicable credit eliminates liability for most taxpayers.

Applicable Credit and Applicable Exclusion

Each taxpayer has a lifetime applicable exclusion that shelters taxable gifts and estates.

For 2025:

  • Applicable exclusion: $13,990,000
  • Applicable credit: $5,541,800
  • Top estate tax rate: 40%

Any applicable credit used during life to offset gift tax reduces the credit available at death.

The executor uses Form 706 to compute estate tax. The tax applies to the entire taxable estate, not to individual beneficiaries.

Portability of Deceased Spousal Unused Exclusion (DSUE)

A surviving spouse may use the DSUE amount of the last deceased spouse.

Key rules:

  • The executor of the deceased spouse must file a timely and complete Form 706 to elect portability.
  • The DSUE amount is added to the surviving spouse’s own exclusion.
  • The last deceased spouse is determined at the time of a taxable gift.
  • Remarriage does not prevent use of DSUE.
  • DSUE from multiple predeceased spouses may be used in succession, but never combined.
  • DSUE cannot be used for gifts made before the DSUE arose.

The portability election is irrevocable.

Generation‑Skipping Transfer (GST) Tax

GST tax applies to transfers to a skip person, such as:

  • A grandchild
  • An unrelated person more than 37.5 years younger

A direct skip occurs when property subject to estate tax passes to a skip person.

The GST tax rate is a flat 40%. GST has its own separate lifetime exclusion, equal to $13,990,000 for 2025, adjusted annually for inflation.

The GST exclusion applies automatically unless the donor opts out.

Gross Estate Components

The gross estate includes the fair market value of all property in which the decedent had an interest at death, plus:

  • Retained life estates
  • Certain reversionary interests
  • Revocable transfers
  • Transfers taking effect at death
  • Life insurance owned by the decedent or payable to the estate
  • Certain gifts made within three years of death
  • Certain annuities
  • Joint interests and tenancies by the entirety
  • Property subject to a general power of appointment
  • QTIP property
  • Community property interests

Alternate Valuation Date

The executor may elect to value the estate:

  • Six months after death, or
  • On the date of disposition if property is sold, exchanged, or distributed within six months

The election is allowed only if it reduces both:

  • The gross estate, and
  • The estate tax due

Property affected only by the passage of time is valued at death and adjusted for non‑time‑related changes.

Taxable Estate Deductions

Allowable deductions include:

  • Funeral expenses
  • Debts and claims
  • Administrative expenses
  • Marital deduction (subject to QDOT rules for non‑citizen spouses)
  • Charitable deduction
  • State death taxes
  • Losses during estate administration not reimbursed by insurance

Applying the Applicable Credit

Estate tax computation:

  1. Add taxable estate + post‑1976 taxable gifts
  2. Apply estate tax rates to determine tentative tax
  3. Subtract credits:
    • Applicable credit
    • Credit for foreign death taxes
    • Credit for federal gift taxes on pre‑1977 gifts
    • Credit for tax on prior transfers

If credits exceed tentative tax, no estate tax is due.

Filing Form 706

Form 706 must be filed when:

  • The gross estate + adjusted taxable gifts exceed the filing threshold ($13,990,000 for 2025), or
  • The estate elects portability, regardless of size

Deadlines:

  • Due 9 months after death
  • Automatic 6‑month extension available via Form 4768

The IRS may grant additional time to pay (up to 10 years) for reasonable cause.

Estate Income Tax (Form 1041)

An estate must file Form 1041 if:

  • Gross income is $600 or more, or
  • Any beneficiary is a nonresident alien

Deadlines:

  • Calendar‑year estate: April 15
  • Fiscal‑year estate: 15th day of the 4th month after year‑end

Form 7004 provides a 5½‑month extension to file, but not to pay.