Estate and Gift Tax Basics

The federal estate and gift taxes apply to transfers of wealth, either at death or during life. For most families they cost nothing, because a large exclusion shelters the first $15 million of transfers per person in 2026. Even so, gifts above the annual limit must be reported, estate returns are sometimes filed to preserve a spouse's unused exclusion, and Illinois taxes smaller estates than the federal government does. This guide covers the basics.

The numbers

The One Big Beautiful Bill Act set the 2026 basic exclusion at $15,000,000, with inflation adjustments from 2027 forward. The generation-skipping transfer (GST) exemption is also $15,000,000 for 2026.

Federal estate tax

The estate tax applies to the value of everything the person owned or controlled at death (the gross estate), plus taxable gifts made during life, above the exclusion. The executor files Form 706 if the gross estate plus adjusted taxable gifts exceeds the basic exclusion ($15,000,000 for deaths in 2026), or if the executor elects portability. Transfers to a U.S.-citizen spouse and to qualifying charities are generally deductible.

Form 706 and any tax are due 9 months after the date of death. Form 4768 gives an automatic 6-month extension to file, but it does not extend the time to pay.

Example (hypothetical): A widower dies in 2026 with a $12,000,000 estate and no large lifetime gifts. No federal estate tax is due and Form 706 is not required, but Illinois estate tax may apply because the estate exceeds Illinois' $4,000,000 threshold.

Gift tax and Form 709

A gift is a transfer for less than full value. Gifts up to the annual exclusion per recipient are not taxable gifts and generally need no return. Gifts above it are reported on Form 709, which uses up part of your lifetime exclusion but usually causes no tax.

Example (2026, hypothetical): A grandparent gives a granddaughter $100,000 in cash. The first $19,000 is excluded. The other $81,000 is reported on Form 709 by April 15, 2027, and reduces the lifetime exclusion from $15,000,000 to $14,919,000, assuming no earlier taxable gifts. No gift tax is due.

Things that surprise people:

• Married couples who want to split a gift, so each spouse is treated as giving half, must file Form 709 even if no tax is due.
• Gifts of future interests, such as many gifts in trust, do not qualify for the annual exclusion and must be reported.
• Paying tuition directly to a school or medical bills directly to a provider is not a taxable gift. Contributions to a 529 plan do not qualify for this tuition exclusion.
• An extension of time to file Form 709 does not extend the time to pay. Filing an extension for your income tax return extends Form 709 too.

Portability and the surviving spouse

When a married person dies, the unused part of the basic exclusion, called the deceased spousal unused exclusion (DSUE) amount, can pass to the surviving spouse, but only if the executor files a timely and complete Form 706 to elect portability. Without the election, the unused amount is lost.

Example (hypothetical): If a spouse dies in 2026 using only $5,000,000 of the $15,000,000 exclusion, the executor can transfer the remaining $10,000,000 to the surviving spouse. If an estate was not otherwise required to file, Rev. Proc. 2022-32 lets it file for portability up to the fifth anniversary of the death.

Income tax basis: inherited versus gifted

Property inherited from a decedent generally takes a basis equal to its fair market value on the date of death (or the alternate valuation date if elected), which can reduce capital gains tax when it is sold. Property given during life generally keeps the donor's basis, so gain built up before the gift carries over. This difference often matters more than gift tax. When Form 706 is required, the estate also reports asset values to the IRS and recipients on Form 8971. See capital gains and losses.

Illinois estate tax

Illinois taxes estates whose value, including adjusted taxable gifts, exceeds $4,000,000. Illinois describes that amount as a taxable threshold, not a credit against tax. Estates over it file Illinois Form 700 with the Illinois Attorney General, even if no federal return is required. Illinois computes the tax with an interrelated calculation, and the Attorney General offers a calculator. Because Illinois thresholds differ from federal ones, couples with estates between $4,000,000 and $15,000,000 should review their documents with an estate attorney.

Common mistakes

• Assuming the federal exemption means Illinois owes nothing
• Missing Form 709 when splitting gifts or giving a future interest
• Skipping the portability election because no tax is due
• Gifting appreciated assets that would have received a stepped-up basis at death
• Not reporting gifts to or from non-U.S. persons correctly

How we can help

We can prepare Form 709 and Form 706 with your attorney, track lifetime gifts, review basis and coordinate the income tax side for estates and beneficiaries. See estates, trusts and inheritance, tax planning and trusts and estates fiduciary returns. For gifts or inheritances involving India, see gifts and inheritance from India. Wills, trusts and titling are legal matters for an attorney.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.