---
name: estate-tax-basics
description: |
  Provides an educational overview of the federal estate tax system, including the
  exemption threshold, portability concept, the difference between estate tax and
  inheritance tax, and when to consult a tax attorney. Produces a concept summary
  and question list for professional consultation.
  Use when the user asks about estate taxes, whether an estate will owe taxes, the
  estate tax exemption, or how estate and inheritance taxes work.
  Do NOT use for providing tax planning advice, recommending specific tax reduction
  strategies, calculating estate tax liability, or filing tax returns.
license: Apache-2.0
metadata:
  author: foundry-skills
  version: "1.0.0"
  tags: "estate-planning legal-literacy guide research"
  category: "legal-civic"
  subcategory: "estate-planning"
  depends: ""
  disclaimer: "not-legal-advice"
  difficulty: "intermediate"
---
# Estate Tax Basics

> **Disclaimer:** This skill provides general legal literacy and educational information to help you understand legal concepts and processes. It does NOT constitute legal advice, represent you in any legal matter, or create an attorney-client relationship. Tax law changes frequently, and specific numbers cited here may be outdated. Always consult a qualified estate planning attorney and CPA licensed in your jurisdiction for advice on your specific situation.

---

## When to Use

**Use this skill when:**
- A user asks how the federal estate tax works and wants a conceptual foundation before consulting a professional
- A user has just experienced a family member's death and wants to understand whether the estate might owe taxes
- A user has heard the term "estate tax exemption" -- from a financial advisor, attorney, or news article -- and wants to understand what it means
- A user asks specifically about the portability of the estate tax exemption between spouses
- A user wants to understand the difference between estate tax and inheritance tax because they received contradictory explanations
- A user is about to meet with an estate attorney or CPA and wants to walk in prepared with the right vocabulary and questions
- A user asks why the estate tax is sometimes called the "death tax" and wants a neutral explanation of the policy debate

**Do NOT use when:**
- The user asks for specific tax reduction strategies (irrevocable life insurance trusts, intentionally defective grantor trusts, grantor retained annuity trusts, family limited partnerships) -- those require a licensed estate planning attorney and are beyond educational overview
- The user asks for a calculation of estate tax owed on a specific estate -- refer to a CPA with estate tax expertise
- The user asks about the mechanics of filing Form 706 (the federal estate tax return) -- refer to a CPA or tax attorney; this is a highly technical filing
- The user asks about gift tax annual exclusions, gift splitting, or how to structure a gifting program -- those are tax planning strategies; refer to a tax advisor
- The user asks about income tax implications of inherited assets, including step-up in basis rules, IRD (income in respect of a decedent), or required minimum distributions from inherited IRAs -- refer to a CPA
- The user asks about trust taxation, including grantor trust rules, DNI, or distributable net income -- refer to a tax attorney or CPA
- The user asks about the taxation of a specific business interest in an estate (valuation discounts, buy-sell agreement tax treatment) -- refer to an estate planning attorney with business succession experience

---

## Process

### Step 1: Establish the User's Context and Urgency

Before delivering information, determine what is actually driving the question. Context controls which concepts to prioritize.

- Ask one clarifying question if the user's situation is ambiguous: "Are you asking because you're doing general estate planning, or did someone recently pass away?"
- If a death has occurred recently, **portability deadlines are time-sensitive** -- prioritize the portability section and the Form 706 filing deadline (9 months from date of death, with a 6-month extension available, for a maximum of 15 months total)
- If the user mentions a specific dollar amount for the estate, note it as context but do not calculate tax liability -- use it only to frame which concepts are most relevant
- Identify whether the user is asking about their own potential future estate or a deceased person's estate -- the framing and urgency differ significantly
- Identify whether the user is a beneficiary wondering about their own tax obligations or an executor or family member trying to understand estate-level obligations
- Note the state if the user mentions it -- state-level estate and inheritance taxes vary dramatically and affect many estates that never approach the federal threshold

### Step 2: Explain the Federal Estate Tax Structure at the Conceptual Level

The federal estate tax is a transfer tax -- it taxes the act of passing wealth at death, not the receipt of that wealth by heirs.

- **Who imposes it:** The IRS, under Chapter 11 of the Internal Revenue Code (IRC Sections 2001 through 2210)
- **Who pays it:** The estate -- meaning the assets are reduced before any distributions reach beneficiaries. The executor or administrator of the estate has primary responsibility for filing and paying
- **What triggers it:** The taxable estate exceeding the applicable exclusion amount (also called the "basic exclusion amount" or BEA)
- **The exclusion amount:** Set by Congress through legislation. The Tax Cuts and Jobs Act of 2017 (TCJA) roughly doubled the exemption. That doubled exemption is scheduled to sunset at the end of 2025, reverting (with inflation adjustments) to approximately half the TCJA level. Because this is a politically active area of tax law, always direct the user to verify the current amount with the IRS or a tax professional -- never state a specific dollar figure as definitive
- **The tax rate structure:** The estate tax uses a graduated rate schedule in IRC Section 2001, but the effective result for most large taxable estates is a top marginal rate of 40% on amounts exceeding the exemption. The graduated rates below the top bracket rarely matter in practice because the exemption itself absorbs the lower brackets
- **Historical context:** The estate tax has existed in some form since 1916. The exemption has ranged from roughly $600,000 in the 1990s to the historically high levels of the TCJA era. This history matters because it tells users the law is not fixed and the political landscape directly affects their planning

### Step 3: Explain Portability of the Deceased Spousal Unused Exclusion (DSUE)

Portability is one of the most consequential and most frequently misunderstood concepts in estate tax law.

- **What it is:** When the first spouse in a married couple dies, any portion of that spouse's basic exclusion amount not used by their estate can be transferred to the surviving spouse. This is formally called the Deceased Spousal Unused Exclusion (DSUE)
- **The mechanics:** The DSUE is added on top of the surviving spouse's own BEA. If the first spouse's entire exemption was unused (because the estate was below the threshold), the surviving spouse effectively has double the individual exemption
- **What activates it:** Portability is NOT automatic. The executor of the first spouse's estate must file Form 706 (the federal estate tax return) and make an affirmative election on that return, even if no estate tax is owed. This is critical -- many executors and families skip Form 706 when no tax is owed and permanently lose the DSUE
- **The filing deadline:** Form 706 for portability must be filed within 9 months of the date of death. A 6-month extension (Form 4768) is available, pushing the deadline to 15 months. Revenue Procedure 2017-34 and subsequent IRS guidance created a simplified late portability election procedure -- currently, executors have up to 5 years from date of death to make a late election under certain conditions. This window has changed, so verify current IRS guidance
- **DSUE and remarriage:** If the surviving spouse remarries and the new spouse predeceases them, the surviving spouse's DSUE resets to the most recently deceased spouse's unused exclusion. The DSUE from prior spouses is lost. This is a planning nuance relevant to those who have been married more than once
- **DSUE and inflation:** The DSUE amount is fixed at the date of the first spouse's death. It does not grow with inflation adjustments the way the living spouse's own BEA does. This is a subtle but real disadvantage compared to tax-reduction trusts that take advantage of both exemptions at the time of the first death

### Step 4: Explain What Is Included in the Gross Estate (and What Is Not)

This is one of the most important conceptual corrections to make -- the taxable estate is much broader than "what goes through probate."

**Included in the gross estate (IRC Sections 2031 through 2044):**
- All property owned outright at death: real estate, investment accounts, bank accounts, business interests, personal property, vehicles, collectibles, jewelry, cryptocurrency
- **Life insurance death benefits:** If the deceased owned the policy at death (was the "owner" of record) or had any "incident of ownership" (the right to change beneficiaries, borrow against the policy, or surrender it), the death benefit is included in the gross estate -- even though it passes directly to beneficiaries outside of probate
- **Retirement accounts:** The full account balance of IRAs, 401(k)s, 403(b)s, and other qualified plans is included in the gross estate. These assets do not get a step-up in basis and are also subject to income tax when withdrawn -- a phenomenon known as "double taxation" that affects large retirement accounts in taxable estates
- **Revocable trust assets:** Assets held in a revocable living trust are included in the grantor's gross estate. A revocable trust is a probate-avoidance tool, not an estate-tax-avoidance tool
- **Jointly held property:** The deceased's proportionate share of jointly owned property is included. For property held as joint tenants with right of survivorship between spouses (tenants by the entirety), 50% is generally included regardless of who contributed the funds. For joint tenancy between non-spouses, the full value is included unless the surviving owner can prove they contributed to the purchase
- **Annuities:** The value of survivor benefits from annuities or pension plans
- **Certain transfers made during lifetime:** Transfers where the deceased retained control, income rights, or the power to revoke (IRC Sections 2035 through 2038) can pull assets back into the gross estate. The classic trap is the "three-year rule" for life insurance -- transferring a life insurance policy to an irrevocable trust within 3 years of death causes the proceeds to be included in the estate

**Common deductions that reduce the gross estate to the taxable estate:**
- Debts of the deceased (mortgages, credit card balances, car loans, medical bills)
- Funeral and burial expenses
- Administrative expenses of the estate (attorney fees, executor commissions, court costs)
- **The marital deduction (IRC Section 2056):** An unlimited deduction for assets passing to a U.S. citizen surviving spouse. This does not eliminate the estate tax -- it defers it to the surviving spouse's death. Non-citizen spouses do not qualify for the unlimited marital deduction (a Qualified Domestic Trust, or QDOT, is required instead)
- **The charitable deduction (IRC Section 2055):** An unlimited deduction for assets passing to qualified charitable organizations. Charitable bequests are a dollar-for-dollar reduction of the taxable estate

### Step 5: Distinguish Federal Estate Tax from State-Level Estate and Inheritance Taxes

This is one of the most frequently confused areas for non-specialists. There are up to three separate transfer taxes that could apply: federal estate tax, state estate tax, and state inheritance tax.

**State estate taxes:**
- Approximately 12 states (plus the District of Columbia) impose their own estate tax, separate from the federal estate tax
- States with their own estate tax typically have exemption thresholds significantly lower than the federal exemption -- often in the $1 million to $2 million range, though this varies by state and changes with legislation
- An estate that owes zero federal estate tax may still owe substantial state estate tax
- States that have historically imposed estate taxes include Massachusetts, Oregon, Washington, Hawaii, Illinois, Maryland, Maine, Minnesota, New York, Rhode Island, Vermont, and Connecticut (this list changes -- verify current law for the relevant state)
- Some state estate taxes are designed to absorb federal estate tax credits (the old "pick-up tax" model) while others are standalone taxes with their own rate schedules

**State inheritance taxes:**
- Inheritance taxes are levied on the beneficiary, not the estate. The beneficiary pays based on what they receive
- Approximately 6 states impose an inheritance tax: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania (this list changes -- always verify)
- Maryland is notable for imposing BOTH a state estate tax and a state inheritance tax on the same transfer
- Inheritance tax rates and exemptions almost always vary by the beneficiary's relationship to the deceased:
  - **Surviving spouses:** Almost universally exempt from inheritance tax
  - **Direct descendants (children, grandchildren):** Often exempt or taxed at low rates
  - **Siblings:** Moderate rates (often 10--15%)
  - **Non-relatives, friends, unmarried partners:** Highest rates (often 15--20%)
- The state of the deceased's domicile typically controls for personal property. Real property is taxed in the state where it is located, regardless of where the deceased lived

**Summary comparison table:**

| Feature | Federal Estate Tax | State Estate Tax | State Inheritance Tax |
|---|---|---|---|
| Payer | Estate (before distribution) | Estate (before distribution) | Beneficiary (after receiving) |
| Basis of tax | Total gross estate minus deductions | Total estate value (state rules) | Amount received by each beneficiary |
| Who imposes | IRS / federal government | State government only | State government only |
| Exemption level | High (verify current; historically millions per person) | Much lower; often $1M--$2M range | Varies by relationship; spouses often exempt |
| Number of states | All U.S. estates | Approximately 12 states + D.C. | Approximately 6 states |
| Returns | Form 706 | State estate tax return | Varies by state |

### Step 6: Address the Unified Gift and Estate Tax System

Users frequently believe that giving assets away before death is a simple workaround to the estate tax. Explain the unified nature of the system.

- The federal gift tax and the federal estate tax share a single lifetime exemption -- the "unified credit" (IRC Section 2505). The exemption is cumulative across both lifetime gifts and transfers at death
- Taxable gifts made during life reduce the remaining exemption available at death dollar for dollar
- The **annual gift tax exclusion** is a separate, non-cumulative exclusion that allows each person to give up to a specific inflation-adjusted amount per recipient per year without using any lifetime exemption and without filing a gift tax return. This exclusion is indexed for inflation in $1,000 increments. The user should verify the current annual exclusion amount with the IRS (it has been $17,000 and $18,000 per recipient in recent years, as a reference point -- always verify)
- Gifts above the annual exclusion amount require filing Form 709 (the federal gift tax return) and reduce the lifetime unified credit
- The gift tax is paid by the donor (the person giving), not the recipient
- **Gifts made within 3 years of death** do not "pull back" into the estate in most cases -- that rule was eliminated for most assets in 1981. However, the 3-year rule still applies to transfers of life insurance policies

### Step 7: Clarify Persistent Misconceptions and Generate Professional Questions

Correct the five most common misconceptions directly, then generate a tailored list of questions the user should bring to their professional consultation.

**Misconception 1: "A valuable house means the estate owes tax."**
The exemption applies to the total gross estate minus deductions, not to individual assets. A home worth $2 million does not automatically trigger tax -- it depends on the total estate value relative to the exemption.

**Misconception 2: "A revocable living trust shelters assets from estate tax."**
A revocable living trust avoids probate. It does not remove assets from the gross estate for estate tax purposes. The grantor retains control, so the assets are fully included in the estate.

**Misconception 3: "Beneficiaries have to pay the estate tax."**
Federal estate tax is paid by the estate before distribution. Beneficiaries receive what remains after taxes and expenses. The exception is state inheritance tax, which is the beneficiary's obligation in states that impose it.

**Misconception 4: "I can give everything away before I die and avoid estate tax."**
The gift tax and estate tax share the same lifetime exemption. Large lifetime gifts deplete the exemption available at death. The annual exclusion allows modest annual gifting, but systematic transfers of a large estate through gifts alone would take decades and requires a structured program designed by a tax advisor.

**Misconception 5: "The estate tax only matters for billionaires."**
While the federal exemption is currently high, several states impose estate taxes at much lower thresholds. Additionally, the federal exemption is scheduled to decrease significantly if TCJA provisions sunset. An estate that comfortably fits under today's exemption may not fit under tomorrow's rules. State-level taxes can affect estates in the $1 million to $3 million range.

---

## Output Format

Produce the following structured output after working through the process above. Tailor the emphasis based on the user's specific context.

```
## Estate Tax Concepts Overview

> Note: Tax law changes frequently. Verify all thresholds, deadlines, and rates
> with a CPA or estate planning attorney. This overview reflects general principles,
> not current specific dollar amounts.

---

### Your Situation at a Glance
[One to three sentences summarizing what the user told you: recent death vs. planning,
approximate estate size if provided, married or not, state mentioned if any.
Flag any time-sensitive issues (e.g., portability deadline).]

---

### Core Concept Summary

| Concept | What It Means | Why It Matters to You |
|---|---|---|
| Federal estate tax | Tax on asset transfers at death, paid from estate assets before distribution | May or may not apply depending on total estate value vs. exemption |
| Basic Exclusion Amount (BEA) | Per-person exemption that shelters estate value from federal tax | Verify current amount; estates below this owe no federal estate tax |
| Portability / DSUE | Surviving spouse can claim first spouse's unused BEA | Must file Form 706 within 9 months (15 months with extension) -- do not skip |
| Marital deduction | Unlimited transfers to U.S. citizen spouse are estate-tax-deferred | Defers federal tax; does not eliminate it permanently |
| Charitable deduction | Bequests to qualified charities reduce the taxable estate dollar for dollar | Can significantly reduce estate tax exposure for charitably minded estates |
| State estate tax | Some states impose their own estate tax, often with much lower thresholds | May apply even when federal tax does not |
| State inheritance tax | Some states tax beneficiaries based on what they receive | Rate often depends on beneficiary's relationship to deceased |
| Gross estate | Everything the deceased owned or controlled: probate assets + retirement accounts + life insurance + revocable trusts + jointly held property | Broader than most people expect |
| Unified credit | Gift and estate tax share one lifetime exemption | Lifetime gifts above the annual exclusion reduce exemption available at death |

---

### What Is (and Is Not) in the Taxable Estate

**Generally Included:**
- Real estate (at fair market value at date of death)
- Investment and bank accounts
- Retirement accounts (IRA, 401k, 403b -- full balance included)
- Life insurance death benefits (if deceased owned the policy)
- Revocable living trust assets
- Proportionate share of jointly held property
- Business interests and partnership interests
- Personal property: vehicles, collectibles, jewelry, cryptocurrency

**Common Deductions:**
- Debts of the deceased (mortgages, credit cards, medical bills)
- Funeral and estate administration expenses
- Marital deduction (unlimited, for assets to U.S. citizen spouse)
- Charitable bequests (unlimited, for qualifying organizations)

---

### Federal Estate Tax vs. State-Level Taxes

| Feature | Federal Estate Tax | State Estate Tax | State Inheritance Tax |
|---|---|---|---|
| Who pays | Estate (executor) | Estate (executor) | Beneficiary |
| Tax basis | Total taxable estate | Total estate (state rules) | Each beneficiary's share |
| Exemption level | High (verify current) | Often $1M--$2M range; varies | Varies by relationship |
| Applies where | All U.S. estates | Approx. 12 states + D.C. | Approx. 6 states |
| Return filed | Form 706 | State-specific return | State-specific return |

---

### Portability Decision Framework (Married Couples)

```
Did the first spouse die with an estate BELOW the federal exemption?
    ├── YES → DSUE may be available. Has Form 706 been filed?
    │       ├── NO, and it has been < 9 months since death → File immediately
    │       ├── NO, and 9-15 months have passed → File Form 4768 extension NOW
    │       ├── NO, and it has been < 5 years → Explore simplified late election
    │       └── YES → Confirm DSUE amount with CPA; it is locked in
    └── NO → Estate was taxable; DSUE is whatever exemption remained after tax
```

---

### Common Misconceptions Corrected

| What People Believe | What Is Actually True |
|---|---|
| A valuable home triggers estate tax | One asset's value does not determine the tax; total estate vs. exemption does |
| A revocable living trust reduces estate tax | Revocable trust assets are fully included in the gross estate |
| Beneficiaries pay the estate tax | The estate pays before distribution (except state inheritance tax, which beneficiaries pay) |
| Giving assets away eliminates estate tax | Gifts above annual exclusion deplete the same unified lifetime exemption |
| Estate tax only affects the ultra-wealthy | State estate taxes apply at much lower thresholds; federal exemption may decrease |

---

### Questions to Bring to Your CPA or Estate Planning Attorney

**Always ask:**
1. What is the current federal estate tax exemption (Basic Exclusion Amount)?
2. Does the state where the deceased was domiciled impose a state estate tax? At what threshold?
3. Does that state (or any state where real property is located) impose a state inheritance tax? What are the rates by beneficiary relationship?
4. What is the total gross estate -- including retirement accounts, life insurance, and revocable trust assets -- not just the probate estate?

**If married:**
5. Was a Form 706 filed for the first spouse's estate to elect portability of the DSUE?
6. If not, what is the deadline, and can a late portability election still be made?
7. Is there a benefit to using a bypass trust (credit shelter trust) instead of relying solely on portability?

**If the estate appears to approach or exceed the exemption:**
8. What strategies exist to reduce the taxable estate, and what are the trade-offs? (This is planning advice -- the attorney will guide)
9. Are there life insurance policies that should be reviewed for ownership -- could an ILIT reduce estate tax exposure?

**If you are a beneficiary:**
10. Is the estate solvent? Will taxes and expenses be paid before distribution?
11. Do I owe any state inheritance tax on what I receive?
12. What is the "stepped-up basis" on inherited assets, and how does that affect my future capital gains tax?

---

### Time-Sensitive Action Items
[List only what applies to the user's situation]
- [ ] URGENT (if death occurred): Determine Form 706 portability election deadline
- [ ] Determine approximate gross estate value (all categories above, not just probate)
- [ ] Identify the state(s) involved and verify state estate/inheritance tax rules
- [ ] Verify the current federal exemption amount with a tax professional or IRS.gov
- [ ] Consult a CPA and estate planning attorney before taking any action
- [ ] If executor: identify all deadlines (estate tax return: 9 months; extensions available)

---

### Key Takeaway
[Calibrate to the user's situation. Examples:]

For estates well below the federal threshold:
"Federal estate tax is very unlikely to apply to an estate of this size under current law.
State-level taxes may still apply, and the exemption can change with legislation.
If there is a surviving spouse, do not skip the portability conversation with your CPA."

For estates approaching the threshold:
"An estate of this size warrants a careful conversation with an estate planning attorney
and CPA. The federal exemption could change significantly in the coming years, and
state taxes may already apply. The cost of professional guidance now is typically
small relative to the potential tax liability."

For estates clearly above the threshold:
"An estate of this size very likely has federal estate tax exposure and almost certainly
has state-level tax exposure. Estate planning strategies exist -- but they require an
attorney's guidance. Proceed to consultation urgently."
```

---

## Rules

1. **Never cite a specific exemption dollar amount as current.** The Basic Exclusion Amount changes with legislation and annual inflation adjustments. The TCJA provisions are scheduled to sunset. Citing a specific number as "current" risks being seriously wrong by the time the skill is used. Always say "verify the current amount with a tax professional or the IRS."

2. **Never provide tax planning recommendations.** Explaining that irrevocable trusts, ILITs, GRATs, or QTPRTs exist is acceptable at an encyclopedic level. Recommending that the user create one or execute a specific strategy is not -- that constitutes legal and tax advice requiring a licensed professional.

3. **Never calculate estate tax liability.** Even if the user provides complete estate details, do not compute tentative tax, apply the unified credit, or produce a tax figure. The calculation requires current IRS rate tables, state-specific analysis, and knowledge of elections available to the estate.

4. **Always flag the portability deadline when a spouse has recently died.** The Form 706 filing window is time-limited. Missing the portability election can be an irreversible, extremely costly mistake. If the user mentions that a spouse died recently, treat the portability election as a time-sensitive emergency requiring immediate professional consultation.

5. **Always distinguish the gross estate from the probate estate.** Users routinely underestimate their taxable estate because they think only in terms of probate assets. Retirement accounts, life insurance owned by the deceased, and revocable trust assets are consistently overlooked. Correct this proactively.

6. **Never confuse the marital deduction with estate tax elimination.** Assets passing to a surviving spouse qualify for the unlimited marital deduction and owe zero federal estate tax at the first death. But this only defers the tax -- it accumulates in the surviving spouse's estate. The tax is eliminated only if it falls within the surviving spouse's combined exemption at the second death.

7. **Always distinguish federal estate tax, state estate tax, and state inheritance tax as three separate systems.** Many users hear "no estate tax" from one source and assume it means no transfer taxes of any kind. A state inheritance tax is paid by the beneficiary, not the estate, and is a completely separate obligation.

8. **Always note the unified nature of the gift and estate tax system when the user mentions gifting.** If a user says "I want to give assets away to avoid estate tax," explain that lifetime gifts above the annual exclusion deplete the same unified exemption. Do not suggest a gifting program or quantify the benefits -- refer to a tax advisor.

9. **Never state that a revocable living trust reduces estate tax.** This is one of the most persistent misconceptions in estate planning. A revocable trust avoids probate. It has no estate tax benefit. Only irrevocable trusts -- where the grantor genuinely relinquishes control -- can remove assets from the gross estate.

10. **Always verify the user's state context.** State laws governing estate and inheritance taxes vary dramatically, change frequently, and can result in significant tax obligations on estates that owe nothing federally. If the user's state is unknown, ask or explicitly note that state-level taxes must be verified. Do not assume a user in a low-tax state has no state-level concern without checking the current rules.

---

## Edge Cases

### 1. Recent Death with Surviving Spouse Who Has Not Filed Form 706

This is the highest-urgency scenario in estate tax education. Portability of the DSUE is not automatic and has strict deadlines.

- Determine how long ago the first spouse died. If fewer than 9 months, the standard filing deadline still applies -- emphasize urgency
- If 9--15 months have passed, a Form 4768 extension may have been timely filed -- the user must verify this with the executor or attorney
- If fewer than 5 years have passed, a simplified late portability election may be available under current IRS guidance (Revenue Procedure 2022-32 or successor guidance -- always verify). The estate must not have been required to file Form 706 for tax reasons
- If more than 5 years have passed (or the simplified procedure is unavailable), the DSUE is likely permanently lost -- and that loss may mean millions in higher estate tax on the surviving spouse's future estate
- Do not delay this conversation. Recommend an immediate call to an estate attorney or CPA, not a future appointment

### 2. Estate Value Appears Below Federal Threshold but User Lives in a State with a Lower State Estate Tax

Several states impose estate taxes with exemptions in the $1 million to $2 million range. An estate that is comfortable under the federal threshold may owe significant state estate tax.

- Ask for or confirm the user's state of domicile at the time of death
- Note that real property located in another state may trigger that state's estate tax even if the deceased was domiciled elsewhere
- Provide the general framework (state taxes exist, thresholds are lower) without citing specific current state figures -- those change frequently and vary more than federal law
- Recommend the user verify their specific state's current rules with a local estate attorney or CPA

### 3. Large Retirement Account in an Estate That Appears Near or Above the Exemption

This scenario involves potential double taxation: the retirement account balance is included in the gross estate for estate tax purposes, AND future withdrawals are subject to income tax for beneficiaries. This is one of the most expensive intersections in estate tax law.

- Explain the concept clearly: retirement accounts don't get a stepped-up basis (unlike most other inherited assets), so the beneficiary will pay income tax as they withdraw funds from an inherited IRA
- Note that the SECURE Act changed the rules for most non-spouse beneficiaries -- the 10-year rule for inherited IRA distributions replaced the stretch IRA in most cases. This is an income tax concept -- refer to a CPA for specifics
- Emphasize that the user should tell their estate attorney and CPA about the size of the retirement accounts specifically, because the planning implications are significant
- Do not recommend specific strategies (Roth conversions, charitable remainder trusts, etc.) -- refer to the advisors

### 4. User Is a Beneficiary Who Received an Inheritance and Is Confused About Their Tax Obligations

Many beneficiaries receive an inheritance and immediately worry they owe taxes on it. Clarify the framework:

- Federal estate tax was paid by the estate before distribution. The beneficiary does not owe federal estate tax
- If the user's state imposes an inheritance tax, they may owe that tax based on what they received and their relationship to the deceased. Provide the framework and refer to a CPA or the state tax authority
- Most inherited assets (non-retirement accounts) receive a "stepped-up basis" -- the beneficiary's cost basis for capital gains purposes is reset to the fair market value at the date of death. This is an income tax concept, not an estate tax concept -- refer to a CPA, but mention it because it is highly relevant to beneficiaries who plan to sell inherited assets
- Inherited retirement accounts (IRAs, 401ks) do NOT get a stepped-up basis. Withdrawals are subject to ordinary income tax. Refer to a CPA for guidance on distribution planning

### 5. Non-Citizen Surviving Spouse

The unlimited marital deduction does NOT apply to a non-citizen surviving spouse. This is a significant trap.

- The estate of a deceased U.S. citizen or resident cannot claim the unlimited marital deduction for assets passing to a non-citizen spouse, regardless of how long the couple has been married or whether the surviving spouse is a permanent resident
- A Qualified Domestic Trust (QDOT) is the mechanism that allows deferral of estate tax for non-citizen surviving spouses -- but the trust must be established before the estate tax return is filed and must meet specific requirements under IRC Section 2056A
- If the user mentions a non-citizen surviving spouse, immediately flag this as a situation requiring urgent, specialized legal counsel. The tax consequences of getting this wrong are severe and potentially irreversible
- Do not attempt to explain QDOT mechanics in detail -- this is advanced territory requiring a specialist

### 6. The Federal Exemption Sunset and Planning Uncertainty

The TCJA doubled the estate tax exemption effective in 2018. That provision is currently scheduled to sunset after December 31, 2025, reverting the exemption (with inflation adjustments) to approximately the pre-2018 level -- roughly half of the TCJA amount.

- Users with estates in the range between the post-sunset exemption and the current TCJA exemption are in a planning window where action before sunset (if it occurs) could be valuable
- Gifts made using the higher TCJA exemption before sunset are protected from "clawback" under final IRS regulations (T.D. 9884) -- meaning gifts made during the higher exemption period will not be recaptured if the exemption later decreases. This is an important planning consideration for large estates
- However, whether the sunset occurs depends on Congressional action. It may be extended, made permanent, or modified. Do not advise based on an assumption that the sunset will or will not happen
- Frame this for users as: "There is currently uncertainty about the exemption level in future years. This is a reason to consult with an estate planning attorney now if your estate is in the range that could be affected."

### 7. Estate with Out-of-State Real Property

When a deceased person owned real estate in multiple states, that property may create multi-state tax obligations.

- Each state taxes real property located within its borders. The deceased's domicile state controls for personal property (bank accounts, investment accounts, personal property)
- An estate may need to file estate tax returns in multiple states -- one for the domicile state and one for each state where real property is located
- This is a significant complication that requires an estate attorney familiar with multi-state estate administration
- Flag this specifically if the user mentions real estate in a state different from the state of domicile, particularly if any of those states impose an estate or inheritance tax

---

## Example

**Input:** "My mother died last month and my father is still alive. Her estate is worth about $4 million. My dad is a U.S. citizen. We haven't done anything yet with taxes. Do we owe estate taxes?"

**Output:**

## Estate Tax Concepts Overview

> Note: Tax law changes frequently. Verify all thresholds, deadlines, and rates with a CPA or estate planning attorney before taking any action.

---

### Your Situation at a Glance

Your mother passed away approximately one month ago, leaving an estate of roughly $4 million. Your father, a U.S. citizen, survived her. You have not yet taken action on tax filings. **This situation has time-sensitive elements** -- specifically, a window to elect portability of your mother's unused estate tax exemption that closes 9 months from the date of death. Please read the portability section below carefully.

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### Immediate Answer: Will the Estate Owe Federal Estate Tax?

The short answer is: almost certainly not at the federal level due to the unlimited marital deduction -- but there are critical steps that must be taken.

**Because your father is a U.S. citizen and survived your mother:**
The unlimited marital deduction (IRC Section 2056) allows an unlimited amount of assets to transfer from one spouse to another, free of federal estate tax, at death. This means that if your mother's assets pass to your father (through a will, joint ownership, beneficiary designations, or a revocable trust), the estate owes **zero federal estate tax** regardless of the estate's size.

This is not permanent tax elimination -- it is deferral. The deferred tax becomes relevant when your father eventually dies and his estate is calculated.

**However, three important questions must be answered:**
1. Does all $4 million actually pass to your father? If any portion passes to children, other individuals, or non-marital trusts, those amounts do not qualify for the marital deduction and are subject to estate tax to the extent they exceed the exemption.
2. Does the state where your mother was domiciled impose a state estate or inheritance tax? State rules may apply at lower thresholds and are separate from the federal analysis.
3. **Has anyone filed Form 706 to elect portability?** (See below -- this is urgent.)

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### Core Concept Summary

| Concept | What It Means | How It Applies to Your Situation |
|---|---|---|
| Federal estate tax | Tax on transfers at death, paid from estate assets | Potentially $0 due to marital deduction if all assets pass to your father |
| Basic Exclusion Amount (BEA) | Per-person exemption shielding estate from federal tax | Verify current amount; your mother has her own BEA that may be unused |
| Marital deduction | Unlimited transfer to U.S. citizen spouse: no federal tax at first death | Applies here -- assets to your father are federally tax-free |
| Portability / DSUE | Your mother's unused BEA can transfer to your father, but only if Form 706 is filed | **TIME SENSITIVE: You have approximately 8 months remaining from date of death** |
| State estate tax | Some states tax estates at lower thresholds than federal law | Must verify the rules in your mother's state of domicile |
| State inheritance tax | Some states tax beneficiaries on what they receive | Check your state -- rates often depend on relationship to deceased |
| Gross estate | All assets: home, accounts, retirement accounts, life insurance, revocable trusts | The $4 million should include all of these, not just probate assets |

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### What Is Included in the $4 Million?

Make sure the $4 million estimate includes all of the following (not just assets going through probate):

**Likely included:**
- Home and any other real estate (at current fair market value)
- Investment and brokerage accounts
- Bank accounts
- Retirement accounts (IRA, 401k -- the full balance is in the estate even though it passes directly to your father as beneficiary)
- Life insurance your mother owned and on which she was the "owner of record" (not just the insured)
- Assets in any revocable living trust your mother had (revocable trusts are included in the estate)
- Her share of any jointly held accounts or property

If any of these were excluded from the $4 million estimate, the actual gross estate may be higher or lower. A CPA or estate attorney will calculate the official gross estate figure.

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### Portability: The Critical Issue Right Now

**⚠ Time-Sensitive -- Act Within the Next 8 Months (Approximately)**

Because your mother likely has a federal estate tax exemption (the Basic Exclusion Amount) that her estate did not fully use (since the marital deduction eliminated the tax), your father can claim her unused exemption -- called the Deceased Spousal Unused Exclusion (DSUE) -- and add it to his own exemption when his estate is eventually settled.

**This effectively gives your father up to double the individual exemption.**

**To claim this benefit, your father's estate executor must:**
1. File Form 706 (the federal estate tax return) for your mother's estate
2. Make the portability election on that form
3. File within 9 months of your mother's date of death (with a 6-month extension available if Form 4768 is filed before the 9-month deadline)

**If no one files Form 706, the DSUE is lost permanently.** Given that your father's future estate could be $4 million or more -- and the federal exemption may decrease significantly if current law sunsets -- losing your mother's unused exemption could cost your family hundreds of thousands of dollars or more in future estate taxes.

**Action required: Contact a CPA or estate planning attorney this week.**

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### Federal Estate Tax vs. State-Level Taxes

| Feature | Federal Estate Tax | State Estate Tax | State Inheritance Tax |
|---|---|---|---|
| Who pays | Estate (executor) | Estate (executor) | Beneficiary (your family members) |
| Applies to this estate | Likely $0 due to marital deduction | Depends on your mother's state -- verify | Depends on the state -- verify |
| Exemption level | High (verify current amount) | Often $1M--$2M range | Often exempt for children/spouse |
| Key action | File Form 706 for portability | File state return if required | Beneficiaries should check their obligation |

**What to check for your state:**
- Was your mother domiciled in a state with its own estate tax? Some states have exemptions as low as $1 million
- Did she own real property in a different state from where she lived? That state's tax may apply to the real estate
- Does your state impose an inheritance tax on amounts received by children? In states with inheritance taxes, direct descendants are often exempt or taxed at low rates -- but verify

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### Questions to Bring to Your CPA and Estate Planning Attorney

**Bring these questions to a professional consultation as soon as possible:**

1. What is the current federal estate tax Basic Exclusion Amount, and how much of my mother's exclusion was unused?
2. Is the marital deduction available for all assets in this estate, or do any assets pass outside of it (for example, to children directly)?
3. Does the state where my mother lived impose a state estate tax or inheritance tax? Are there filing requirements even if no tax is owed?
4. Do we need to file Form 706 for portability -- and can you file it or refer us to someone who can?
5. What is the exact deadline for Form 706 given my mother's specific date of death?
6. If we cannot meet the 9-month deadline, what are our extension options?
7. Are there any assets not included in our $4 million estimate that should be?
8. My mother had [retirement accounts / life insurance / a revocable trust] -- are those properly included in the gross estate calculation?
9. Will any of the children owe state inheritance tax on what they receive?
10. What should my father's estate planning documents look like now, given the DSUE from my mother?

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### Time-Sensitive Action Items

- [ ] **URGENT (within days):** Contact a CPA or estate planning attorney about the Form 706 portability filing deadline
- [ ] Calculate the full gross estate (all categories listed above, not just probate assets)
- [ ] Determine whether all $4 million passes to your father, or whether some assets pass to other beneficiaries
- [ ] Verify the current federal exemption amount with your tax professional
- [ ] Identify your mother's state of domicile and verify that state's estate tax and inheritance tax rules
- [ ] Confirm whether any real property is located in a state different from your mother's domicile
- [ ] Ensure the executor has retained or will retain qualified legal and accounting counsel

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### Key Takeaway

Your mother's estate almost certainly owes no federal estate tax because of the unlimited marital deduction for assets passing to your father. However, **the portability election is not automatic, and the window to act is approximately 8 months from the date of death.** Missing this deadline is irreversible and can result in a much larger tax bill when your father eventually passes. A CPA and estate planning attorney should be engaged immediately -- this week, not next month.

State-level taxes are a separate question that depends on your specific state and require local verification. Even if federal taxes are zero, state obligations may exist.
