2026 Federal and State Estate Tax Law Changes Explained

What Happened

Federal estate planning law changed significantly in 2026 with the passage of the Big Beautiful Bill. The legislation raised the federal estate and gift tax exemption to $15,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Sep 15, 2026View source per individual and $30,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Sep 15, 2026View source for married couples. Estates exceeding those thresholds face federal estate tax at a top rate of 40%26 USC 2001(c)Verified Sep 15, 2026View source on the excess amount. The annual gift exclusion also stands at $19,00026 USC § 2503(b); Rev. Proc. 2025-32 § 4.42Verified Sep 15, 2026View source per recipient in 2026, allowing families to transfer wealth to an unlimited number of recipients each year without touching the lifetime exemption.

At the state level, Maryland and the District of Columbia both impose their own estate taxes with substantially lower exemption thresholds. Maryland sets its estate tax exemption at $5 million and also levies a 10% inheritance tax on assets passing to heirs who fall outside a narrow category of close relatives. The District of Columbia applies an exemption of $4,988,400, with progressive estate tax rates ranging from 11.2% to 16%. Virginia, by contrast, imposes neither an estate tax nor an inheritance tax, making it one of the more favorable jurisdictions on the East Coast for estate planning purposes.

The estate planning firm JDKatz, based in Bethesda, Maryland, published a detailed analysis of these changes in August 2026. The firm highlighted a specific technical risk that the new exemption levels create for older trust documents. Formula-based trusts — those that allocate assets to a bypass or credit shelter trust based on the federal exemption amount — may now overfund those structures under the dramatically higher thresholds. That overfunding can leave other beneficiaries with less than intended and create liquidity problems within an estate. The analysis urged families across Maryland, DC, and Virginia to review existing documents in light of these shifts.

What It Means

The most immediate practical consequence of the higher federal exemption is that many estates previously subject to federal tax no longer fall within the taxable range. Families who structured their plans around earlier, lower thresholds now have room to reconsider their strategies. Aggressive lifetime gifting, grantor retained annuity trusts, spousal lifetime access trusts, and charitable remainder trusts all become more attractive tools when the exemption ceiling rises. The $19,00026 USC § 2503(b); Rev. Proc. 2025-32 § 4.42Verified Sep 15, 2026View source annual exclusion remains a straightforward way to move wealth out of a taxable estate incrementally, without consuming any portion of the lifetime exemption.

Portability continues to play a central role for married couples. Portability allows a surviving spouse to claim the deceased spouse's unused federal exemption, effectively combining both exemptions into a single pool. With the exemption now at $15,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Sep 15, 2026View source per person, a married couple can potentially shelter up to $30,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Sep 15, 2026View source from federal estate tax — but only if the executor files a timely estate tax return to elect portability, even when no tax is owed. Missing that filing deadline eliminates the benefit entirely. For families in Maryland and DC, where state-level taxes apply at much lower thresholds, the federal increase does not eliminate state exposure. Maryland residents with estates above $5 million and DC residents with estates above $4,988,400 still face state estate taxes regardless of where the federal threshold sits. Maryland's inheritance tax adds another layer of complexity, since assets passing to non-close relatives face a 10% tax with only a minimal exemption. Understanding how estate tax and inheritance tax interact is essential for families in those jurisdictions.

The formula-based trust problem deserves particular attention. Across the country, millions of trusts contain language that directs assets into a bypass or credit shelter trust up to the amount of the federal estate tax exemption. When those documents were drafted under a $1 million or $2 million exemption, the math worked as intended. With the exemption now at $15,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Sep 15, 2026View source, the same formula can funnel the entire estate into the bypass trust, leaving a surviving spouse or other beneficiaries with far less than the grantor intended. Irrevocable trusts face additional complexity because their terms cannot simply be amended — options like decanting, which transfers assets from an outdated trust into a new one with updated provisions, may be necessary. Revocable trusts offer more flexibility; a restatement or amendment can update the formula language before the trust becomes irrevocable at the grantor's death. Reviewing when and why trusts need updating helps families recognize the warning signs in their own documents. Assets that pass outside a trust entirely — retirement accounts, life insurance policies, and jointly titled property — carry their own transfer rules and beneficiary designations that operate independently of the trust document. Those designations need to align with the updated plan. The federal step-up in basis rule also remains relevant: inherited assets generally reset to fair market value on the date of death26 USC § 1014Verified Sep 15, 2026View source, which can significantly reduce capital gains exposure for beneficiaries who later sell those assets.

Context from SimplyTrust

The 2026 changes illustrate why estate plans require periodic review rather than one-time creation. A trust or will drafted five years ago under different exemption levels may now produce outcomes the grantor never intended. SimplyTrust's glossary of estate planning terms provides a useful foundation for understanding concepts like bypass trusts, portability, and decanting before diving into a review of existing documents. For families evaluating whether a revocable trust still serves their goals, the SimplyTrust revocable trust platform offers a starting point for organizing assets, naming beneficiaries, and documenting distribution preferences — all of which feed into a more productive conversation with an estate planning attorney about formula language and exemption alignment.

Families navigating the interplay between federal law and state-specific rules in Maryland, DC, or Virginia benefit from working with professionals who understand both layers. The SimplyTrust estate tax planning attorney directory connects families with attorneys who specialize in wealth transfer strategy and multi-jurisdictional planning. For those who want to understand the broader landscape before engaging professional help, SimplyTrust's comprehensive estate planning guide covers the foundational concepts that make these conversations more productive. The current environment — with a historically high federal exemption, active state-level taxes in Maryland and DC, and widespread formula-based trust exposure — makes 2026 a particularly important year to revisit existing plans and confirm they still reflect current law and current intentions.

Source: 2026 Estate Planning Updates for MD, DC, VA, and Beyond - JDKatz