Your net estate is the fair market value of everything you own at death, minus the debts, expenses, and qualifying transfers the tax code lets you subtract. It’s the figure the IRS uses to decide whether federal estate tax is owed, and for someone dying in 2026 the exemption is $15 million per person.1Internal Revenue Service. What’s New – Estate and Gift Tax Anything above that is taxed on a graduated scale that tops out at 40%.2Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax The calculation itself is simple arithmetic. Getting the inputs right is where estates get into trouble.
Step One: Add Up the Gross Estate
The starting number is the gross estate, which includes everything the decedent owned or held certain interests in at death.3Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate Real estate, bank and brokerage accounts, retirement accounts, vehicles, business interests, jewelry, art, and ordinary household belongings all go on the list. Whether an asset is easy to find or sitting forgotten in a safe deposit box makes no difference.
Every item is listed at its fair market value, meaning the price a willing buyer and willing seller would agree on when neither is forced to act.4eCFR. 26 CFR 20.2031-1 – Valuation of Property in General Publicly traded securities have an obvious value. Closely held businesses, undeveloped land, and collectibles usually require a qualified appraiser who can produce a number that will hold up if the IRS pushes back.
Life Insurance Catches People Off Guard
Insurance proceeds surprise a lot of families. If the estate is the named beneficiary, the whole death benefit lands in the gross estate. Even when the money goes directly to a spouse or child, the proceeds still count if the decedent held any “incidents of ownership” in the policy at death: the right to change the beneficiary, to cancel the policy, or to borrow against its cash value.5Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance Any one of those rights pulls the full benefit into the gross estate. Transferring the policy to an irrevocable life insurance trust more than three years before death keeps it out, but that planning has to happen while the insured is still alive and healthy.
Joint Property Has Its Own Rules
Property held in joint tenancy with right of survivorship doesn’t follow intuition. For spouses who are both U.S. citizens, exactly half the value of qualifying joint property is included in the first spouse’s gross estate, no matter who put up the money.6Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests For every other kind of co-owner (unmarried partners, siblings, a surviving spouse who isn’t a citizen) the entire value goes in unless the executor can document how much the survivor actually contributed. Receipts, canceled checks, and loan records matter here.
Step Two: Pick a Valuation Date
The default is to value each asset as of the date of death. The executor can instead elect an alternate valuation date six months later, but only if that choice both lowers the gross estate and lowers the total tax owed.7Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation It exists for cases where asset values drop after death, like a market downturn hitting a stock portfolio.
A few constraints come with it. Anything sold or distributed inside that six-month window is valued on the actual date it moved, not the six-month mark. The election is made on the estate tax return, it can’t be undone once filed, and the return must be filed within one year of its due date (including extensions) for the election to stick. Run the numbers both ways before committing.
Step Three: Subtract the Deductions
Four mechanical categories of deductions reduce the gross estate: funeral expenses, administration costs, claims against the estate, and unpaid debts secured by estate property.8Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes Each has to be allowable under the law of the jurisdiction where the estate is being administered, and only verified debts count.
- Funeral expenses: the national median for a funeral with viewing and burial runs around $8,300; cremation-only services sit closer to $6,300.
- Administration costs: attorney fees, accountant fees, appraisal charges, court filing fees, and the cost of maintaining property while the estate is being settled. For complex estates these can reach tens of thousands.
- Debts of the decedent: mortgages, car loans, credit card balances, medical bills, and personal loans. Only obligations that existed at death count, not expenses the estate takes on later.
- Unpaid taxes: income tax owed for the year of death or prior years.
The Marital Deduction
Property passing to a surviving spouse who is a U.S. citizen is fully deductible with no dollar cap.9Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse This unlimited marital deduction is the most powerful tool married couples have. It doesn’t eliminate the tax; it defers it until the surviving spouse’s death. On the first death, if everything goes to the survivor, no federal estate tax is owed.
The rules change when the surviving spouse isn’t a U.S. citizen. The marital deduction is unavailable unless the property passes through a qualified domestic trust (QDOT), which exists so the IRS can still collect tax when funds eventually leave the trust for the non-citizen spouse. Families in that situation need to plan ahead rather than improvise after a death.
The Charitable Deduction
Bequests to qualifying charities are also fully deductible with no cap.10Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses Eligible recipients include governmental bodies receiving the gift for public purposes, religious organizations, educational institutions, and certain veterans’ groups. The organization has to actually qualify under the statute; a group that lost its tax-exempt status for political activity won’t generate a deduction. Unlike income tax rules on charitable giving, the estate tax version has no percentage-of-income cap.
Step Four: Compare the Result to the 2026 Exemption
Gross estate minus deductions gives you the taxable estate, which is as close to a true “net estate” figure as the tax code uses. Federal tax is calculated on that number using the graduated rate schedule, and the applicable credit (tied to the exemption) wipes out the tax entirely for estates under the threshold.11Internal Revenue Service. Estate Tax
For 2026 deaths the exemption is $15 million per person.1Internal Revenue Service. What’s New – Estate and Gift Tax That figure comes from the One, Big, Beautiful Bill Act (Public Law 119-21), signed July 4, 2025, which raised the amount and made the increase permanent. The scheduled drop that would have cut the exemption roughly in half at the start of 2026 no longer applies.
Anything above the exemption is taxed on a graduated scale starting at 18% on the first $10,000 over and climbing to 40% on amounts more than $1 million above the exemption.2Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax Because the exemption absorbs the lower brackets, almost all tax actually owed falls at the top 40% rate. A $17 million taxable estate, for instance, owes roughly $800,000 on the $2 million above the line.
All of this gets reported on IRS Form 706, due nine months after the date of death.12Internal Revenue Service. Instructions for Form 706 An automatic six-month filing extension is available with Form 4768, though the extension doesn’t push back the payment deadline. Form 706 is only required when the gross estate plus taxable lifetime gifts and any specific gift tax exemption used exceeds the filing threshold, which for 2026 is the same $15 million.
Why Smaller Estates Sometimes File Anyway
If the first spouse dies without using the full $15 million exemption, the leftover piece can transfer to the survivor through an election called portability. The survivor adds the deceased spouse’s unused exclusion to their own exemption, potentially sheltering up to $30 million across both estates.12Internal Revenue Service. Instructions for Form 706
The election only happens if the executor files Form 706, even when the estate is nowhere near the taxable threshold and would otherwise have no filing obligation. A timely, complete return is the election. If the nine-month deadline (plus extension) is missed, Revenue Procedure 2022-32 allows a late filing up to five years after the date of death. Miss both windows and the unused exemption disappears for good. Smaller estates that skip Form 706 because no tax looks due can cost the surviving spouse millions in sheltered capacity later.
State Taxes Can Reach Smaller Estates
Federal rules are only part of the picture. About a dozen states plus the District of Columbia impose their own estate taxes, often with exemptions far below $15 million; some sit as low as $1 million to $2 million. An estate that owes nothing to the IRS can still face a meaningful state bill. A handful of states also levy inheritance taxes, which are charged to each beneficiary based on their relationship to the decedent. Close relatives are frequently exempt or taxed lightly, while distant relatives and unrelated heirs can pay rates up to 16%. Maryland imposes both an estate tax and an inheritance tax.
Because state thresholds are so much lower, the net estate calculation can matter even for moderate-sized estates. Check your state’s specific rules early so the numbers you build toward are the right ones.
Document Everything
Hard-to-value assets draw IRS attention. Closely held businesses, real estate, and art collections are common audit triggers, and valuation disputes can run for years. The strongest defense is a thorough file: formal appraisals from qualified professionals, clear notes on how each number was reached, and complete records for every deduction claimed.
The stakes for getting it wrong aren’t only civil. Willfully filing a false estate tax return, or helping someone else do so, is a federal felony punishable by fines up to $100,000 and up to three years in prison.13Office of the Law Revision Counsel. 26 USC 7206 – Fraud and False Statements That reaches the executor who signs the return and any accountant or attorney who knowingly participates. A reasonable, well-supported methodology protects everyone involved.