The estate tax calculation, step by step

A sequence, like the income tax calculation, and the marks are in knowing what enters where.

The sequence

1. Gross estate - everything the decedent owned or controlled.
2. Less funeral and administration expenses, debts, and casualty losses during administration.
3. Equals the adjusted gross estate.
4. Less the marital deduction and the charitable deduction.
5. Equals the taxable estate.
6. Plus adjusted taxable gifts made during life.
7. Equals the tentative tax base; compute the tentative tax.
8. Less gift taxes payable and the unified credit.
9. Equals the estate tax due.

What is in the gross estate

• Everything owned outright at death, at fair market value.
• The decedent's share of jointly held property - half for spouses, and a share based on contribution for others.
• Life insurance the decedent owned or held incidents of ownership in, at the full death benefit.
• Retirement accounts and annuities.
• Property over which the decedent held a general power of appointment.
• Certain transfers within three years of death, including life insurance transferred away.
• Property transferred with a retained life estate or retained control.

The life insurance line is the one that surprises people. The full death benefit is in the estate if the decedent owned the policy, which is precisely what an irrevocable life insurance trust exists to prevent.

Valuation

Fair market value at the date of death, or the alternate valuation date six months later.

The alternate date may only be elected if it reduces both the gross estate and the estate tax. It cannot be used simply to obtain a lower basis, and property distributed or sold before the six months is valued at that date instead.

The unified credit

Expressed as a credit equivalent to the tax on the basic exclusion amount - USD 15 million in 2026.

It is unified because gift and estate tax share it. Lifetime taxable gifts reduce what remains, which is why the calculation adds adjusted taxable gifts back into the base before computing the tentative tax.

The rate

A progressive schedule reaching a top rate of 40 per cent above the exclusion.

Very few estates pay it at current exclusion levels, which is why estate planning for most clients is about process, control and family rather than about tax - and why a plan built only around the federal number can miss a state liability entirely.