- Estate Planning: Wills, Power of Attorney, Trusts and Legacy
- Power of Attorney: Why a Bank Can Say No to Your Agent
- Estate Tax Rate: Why It Is a Flat 40% Above the Exclusion (you are here)
This is part 3 of 3 of our guide to Estate Planning and Legacy. It picks up where Power of Attorney: Why a Bank Can Say No to Your Agent leaves off, and it is written to stand on its own: the key ideas are restated where you need them.
The rate table in 26 U.S.C. § 2001(c) tops out at “$345,800, plus 40 percent of the excess over $1,000,000.” The exclusion works as a credit equal to the tax on $15,000,000: $345,800 + 40% × ($15,000,000 − $1,000,000) = $5,945,800 in 2026. Every lower bracket sits below $1 million, so the credit absorbs them all and each dollar above the exclusion is taxed at exactly 40%.
Section 2001(b) computes the tax on the taxable estate plus “adjusted taxable gifts,” less gift tax already paid, which is why taxable gifts use up the same exclusion. In the example below: the tax on $17,500,000 + $1,000,000 = $18,500,000 is $345,800 + 40% × $17,500,000 = $7,345,800; minus the $5,945,800 credit, that leaves $1,400,000, which is $3,500,000 × 40%.
At these thresholds, the overwhelming majority of American households will never owe a dollar of federal estate tax. What far more households actually face: a separate annual gift exclusion of $19,000 per recipient in 2026 (rising to $38,000 for a married couple who elect to split gifts), which doesn’t touch the lifetime exemption at all and is a useful tool for moving money to family members gradually — and state-level estate or inheritance taxes, which exist in 16 states and the District of Columbia (as of Oct 2026) with exemption thresholds often far below the federal $15 million, meaning a household with no federal exposure whatsoever can still owe state tax depending on where they live.
A widowed parent dies in 2026 with a $17,500,000 estate after debts and expenses, having made $1,000,000 of taxable gifts during life. Remaining exclusion: $15,000,000 − $1,000,000 = $14,000,000. Amount above it: $17,500,000 − $14,000,000 = $3,500,000. Tax: $3,500,000 × 40% = $1,400,000.
Had the first spouse died earlier in 2026 with the full exclusion unused, and the executor elected portability, the survivor’s exclusion would have been $14,000,000 + $15,000,000 = $29,000,000, and the federal tax zero. Annual-exclusion gifts also move money without touching the exclusion: two parents who split gifts can give $19,000 × 2 = $38,000 a year to each child and grandchild, though gift-splitting requires filing a gift tax return (Form 709). For the running household, with a net worth of $18,000 in year one and an estimated $208,000 by year ten (14.4: Case Three — Surviving Job Loss on Three Months of Runway), federal exposure is zero; the planning that matters is 12.1’s beneficiary forms and, depending on the state, a state estate or inheritance tax.
Every legal document in this Part transfers assets; none of them transfers the judgment needed to manage those assets well. A letter of instruction — not a legal document, simply a plain explanation of where accounts are held, who to contact, and why certain decisions were made — paired with teaching heirs the fundamentals in this volume before they’re needed, is what lets a legacy outlast the person who built it. Some add an ethical will, a letter about the values behind the money. Talk in stages: an allowance teaches a child trade-offs; adult heirs need to know where the documents are and why you divided things as you did.
Accounts for children. A UTMA or UGMA custodial account is an irrevocable gift that an adult manages until the child takes control at an age set by state law; a teen with earnings can also have a custodial Roth IRA (1.7). Under the kiddie tax, a child’s unearned income above $2,700 in 2026 is taxed at the parent’s rate (children under 18, 18-year-olds whose earned income is no more than half their support, and full-time students aged 19 to 23 under the same support test).
A parent leaves a $360,000 house and $240,000 of investments to two children; one wants the house. Equal shares are ($360,000 + $240,000) ÷ 2 = $300,000 each, so the child taking the house owes the other $360,000 − $300,000 = $60,000 on top of the investments, and the will should say how that is raised. An equitable split — more to the child who was the caregiver, say — is legitimate too, but should be explained while the parent can still explain it.
Stock worth $100,000 cost the parent $20,000. Given now, the child keeps the $20,000 basis; a sale at $100,000 taxes an $80,000 gain: $80,000 × 15% = $12,000. The gift exceeds the $19,000 annual exclusion by $81,000, so a gift tax return is due, though no tax (12.4). Left at death, the basis steps up to $100,000 (11.7: Windfalls and Inheritances: What to Do When a Large Sum Arrives) and an immediate sale owes $0. So give cash or high-basis assets while alive, and keep low-basis stock for heirs or charity.
Giving to charity. Donating stock held over a year lets an itemizer deduct its full value and never pay tax on the gain. A donor-advised fund takes the deduction now and makes grants later. From age 70½, a qualified charitable distribution sends IRA money straight to charity, counts toward the RMD (10.6) and stays out of income. From 2026, non-itemizers may deduct up to $1,000 ($2,000 joint) of cash gifts, though not to donor-advised funds (9.2), and itemizers deduct only gifts above 0.5% of AGI: at $200,000 of AGI, the first $200,000 × 0.5% = $1,000 earns nothing.
Write a one-page letter of instruction this year: every account and institution, where the will, POA and directives are kept, whom to call first, and why you chose your executor and agents. Tell the people named where it is, and update it at each annual review.
Every adult: a durable POA, a healthcare proxy, a HIPAA authorization, and a primary and contingent beneficiary on every account and policy, reviewed within 30 days of a marriage, divorce, birth or death. If you have a minor child, sign a will naming a guardian now. Add a funded revocable trust if any one is true: you own real estate in two or more states; an heir is a minor, disabled, or unable to manage a lump sum; you are providing for a spouse and children from an earlier marriage; or assets you cannot pass by beneficiary or transfer-on-death form exceed your state’s small-estate limit (in California, an estate just above the $208,850 limit already owes about 2 × ($4,000 + $3,000 + 2% × $8,850) = $14,354 in statutory fees, against an illustrative $2,000 trust premium). At a spouse’s death, elect portability on Form 706 if the survivor’s estate could ever approach $15 million (2026).
Assumptions: illustrative document costs; state probate law. Ignore the trust part when everything already passes by beneficiary or transfer-on-death registration and no heir needs management.
Leaving an ex-spouse on an employer plan’s beneficiary form. A divorced parent who has not remarried leaves everything to two children by will but never changes the forms on a $200,000 401(k) and a $150,000 employer group life policy. ERISA requires each plan to pay the name on file, even over a waiver in the divorce decree (Kennedy, 2009). The ex-spouse receives $200,000 + $150,000 = $350,000; the children get only the probate estate. Some courts later let an estate sue the ex-spouse to enforce the decree’s waiver, but that is slow, costly and uncertain.
How to avoid it: change every form as soon as the divorce decree allows, naming the children (through a UTMA custodian or trust if minors), and get written confirmation.
What happens if you die without a will?
State intestacy law decides who inherits, by a fixed order that generally puts a spouse and children first, then parents, siblings and more distant relatives. An unmarried partner, friends and charities generally receive nothing, and a court, not you, chooses the guardian of any minor children.
Does a beneficiary designation override a will?
Yes. Retirement accounts, life insurance and payable-on-death or transfer-on-death accounts pass by the form on file, whatever the will says, and skip probate. The exceptions are a current spouse’s rights in a 401(k) and, outside employer plans, state laws that revoke an ex-spouse at divorce.
Do I need a trust, or is a will enough?
A will plus current beneficiary and transfer-on-death forms is enough for most households. A funded revocable trust earns its cost in the cases the Decision Rule lists, chiefly real estate in two states and heirs who need management.
Do I have to pay tax on an inheritance?
Generally not federal income tax: the tax code excludes inheritances from income. Federal estate tax, if any, is paid by the estate, and only above $15 million in 2026. Three things can still cost you: a state inheritance tax in the five states that levy one, income tax on withdrawals from an inherited IRA or 401(k), and tax on later gains above the stepped-up basis (11.7: Windfalls and Inheritances: What to Do When a Large Sum Arrives).
Vol. II’s Part 9.2 covered how banks detect money laundering system-wide. This Part is the same defensive discipline turned toward a single account — yours — against a threat that has grown sharply in both scale and sophistication in the last two years.
The rule in 12.1 runs the other way in India: a nominee is usually not the owner. An institution that pays the nominee is discharged, but the nominee holds the money for the legal heirs named in the will or, without one, by succession law — as the Supreme Court held in Shakti Yezdani v. Jayanand Jayant Salgaonkar (2023). The Banking Laws (Amendment) Act, 2025 lets you name up to four nominees on deposits and lockers, simultaneously or in succession, from Nov 1, 2025; that speeds payment without changing who inherits. One exception: a life-insurance nominee who is a parent, spouse or child is generally a “beneficial nominee” who keeps the money (Insurance Act, Section 39, as amended in 2015).
Succession law depends on religion: the Hindu Succession Act, 1956 (Hindus, Buddhists, Jains, Sikhs); Muslim personal law, under which a will can pass no more than one-third of the estate without the heirs’ consent; and the Indian Succession Act, 1925 for Christians, Parsis and others. A will needs two witnesses; registration is optional. The Repealing and Amending Act, 2025 (assent Dec 20, 2025) deleted Section 213 of the 1925 Act, so probate is no longer legally required in Mumbai, Kolkata and Chennai, though some institutions still ask. India has no estate or inheritance tax (estate duty ended in 1985).
A beneficiary form, not the will, controls an IRA, a 401(k) or a life insurance policy, so an outdated form generally beats a newer will; the will governs everything else, through probate, whose cost is often put at 3%–7% of the estate as a rough rule of thumb, and which takes months. A durable power of attorney, a healthcare proxy, a living will and a HIPAA authorization cover incapacity, which a will never does, and without them the fallback is a court guardianship. A revocable trust avoids probate only for assets actually retitled into it and saves no estate tax, while a trust that keeps its income pays 37% above just $16,000 in 2026. With a $15 million federal exemption per person in 2026 (doubled for a couple only if the executor elects portability on Form 706), most households will never owe federal estate tax. Your real work is current beneficiary forms, cash or high-basis gifts while alive with low-basis stock left to step up at death, and a letter of instruction that passes on judgment as well as assets.
Four questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. A widow dies in 2026 with a $16,200,000 estate after debts and expenses. She made $2,000,000 of taxable gifts during life, and her late husband’s executor never elected portability. What federal estate tax is due?
- $6,480,000
- $480,000
- $1,280,000
- $2,080,000
Reveal Answer
Answer: C. Prior taxable gifts use up the same $15,000,000 exclusion: $15,000,000 − $2,000,000 = $13,000,000 remains, and ($16,200,000 − $13,000,000) × 40% = $1,280,000. Ignoring the gifts gives $480,000; only the excess is taxed. (Part 12.4)
2. A parent owns stock worth $60,000 that cost $10,000. At a 15% rate, how much more tax does a child owe by receiving it as a gift now and selling at once, rather than inheriting it and selling at once?
- $9,000
- $1,500
- $7,500
- $6,150
Reveal Answer
Answer: C. A gift carries over the $10,000 basis, so ($60,000 − $10,000) × 15% = $7,500; at death the basis steps up to $60,000 and the sale owes $0. The $19,000 annual exclusion concerns gift tax, not the gain. (Part 12.5)
3. Worked problem: Assume a $15,000,000 federal estate tax exemption and a flat 40% rate above it. What is the tax on a $16,000,000 estate?
Reveal Answer
Answer: Taxable = $1,000,000. Tax = 40% × $1,000,000 = $400,000.
4. Worked problem: Shares bought for $50,000 are worth $400,000. Compare selling them right after inheriting (stepped-up basis) with receiving them as a lifetime gift (carryover basis), at a 15% capital gains rate.
Reveal Answer
Answer: Inherited: basis $400,000, gain $0, tax $0. Gift: gain $350,000, tax = 15% × $350,000 = $52,500.