Estate Planning Tax Deductions: Federal Rules and Key Strategies

The federal unlimited marital deduction under IRC Section 2056 allows a decedent to transfer an unlimited amount of assets to a surviving U.S. .itizen spouse free of federal estate tax. The deduction generally defers transfer tax. Property that remains owned by, or is otherwise includible in, the surviving spouse's gross estate may be subject to estate tax at the survivor's death.

If the surviving spouse remains a non-U.S. .itizen when the estate-tax return is filed, property generally must pass to a Qualified Domestic Trust and the required election must be made for the estate to claim the marital deduction, unless a treaty or another statutory exception applies. Proper titling and beneficiary designations are essential, as assets passing outside the will through joint ownership or retirement account designations must be reviewed to confirm they qualify.

Under IRC Section 2055, amounts transferred to qualifying charitable organizations are fully deductible from the gross estate with no dollar cap. A split-interest transfer receives a charitable deduction only to the extent it uses a qualifying structure and satisfies the applicable actuarial and statutory requirements. A charitable remainder trust must satisfy IRC §664 and the applicable remainder-interest requirements of §2055(e). A charitable lead trust is governed by different qualifying-interest rules, including §2055(e)(2)(B) for estate-tax purposes and, for lifetime transfers, §§170(f)(2)(B) and 2522(c)(2)(B) as applicable.

Under IRC §2053, the taxable estate may be reduced by funeral expenses, administration expenses, claims against the estate, and qualifying indebtedness. IRC §2054 separately permits a deduction for casualty or theft losses incurred during estate administration when those losses are not compensated by insurance or otherwise. A key planning decision is whether to claim administration expenses on the estate tax return or the estate's income tax return, since claiming them on both is not permitted. To claim eligible expenses as income-tax deductions on Form 1041, the fiduciary must file a Section 642(g) statement waiving the right to deduct those expenses on Form 706. That waiver is generally irrevocable, although different portions of qualifying expenses may be allocated between the two returns when properly documented.

The annual gift tax exclusion allows a donor to make qualifying present-interest gifts of up to $19,000 per recipient in 2026 without using the donor's lifetime exclusion. Two spouses may transfer $38,000 in total to a single recipient if each makes a separate $19,000 gift. If one spouse makes the entire transfer and the couple elects gift splitting, the Form 709 consent and filing rules apply. Direct payments of tuition to an educational institution and direct payments of medical expenses to a provider are excluded entirely under IRC Section 2503(e), with no dollar limit and no effect on the lifetime gift tax exemption.

Taxable lifetime gifts above the annual exclusion reduce the donor's $15 million federal basic exclusion amount. The same unified exclusion applies cumulatively to lifetime gifts and transfers at death, so substantial gifts during life reduce the exclusion remaining for the estate. Form 709 is required for reportable taxable gifts and gift-splitting elections. It is also used to affirmatively allocate GST exemption, report certain direct skips, or elect out of the automatic-allocation rules, as applicable. Gift tax reporting errors can create unintended exposure on the estate-tax return.

The generation-skipping transfer tax applies to transfers to grandchildren and more remote descendants, or to unrelated individuals more than 37.5 years younger than the donor, in addition to estate or gift tax. Each individual has a GST exemption of $15 million in 2026, operating separately from the gift and estate-tax exclusion. Unlike the federal estate-tax exclusion, unused GST exemption is not portable to a surviving spouse, making timely allocation to dynasty or multigenerational trusts particularly important.

For decedents dying in 2026, the basic exclusion amount is $7.35 million. The applicable estate-tax credit phases out above that threshold and is eliminated once the taxable estate exceeds approximately $7,717,500 under Tax Law Section 952(c). This cliff can produce a tax liability greater than the amount by which the estate exceeded the exclusion, making precise planning around the exclusion level essential for estates in that range. The state does not allow portability of an unused exclusion between spouses, which may support credit shelter trust planning depending on basis, cash flow, control, and other tax considerations.

When an estate seeks QTIP treatment for qualifying terminable-interest property, the election must be made directly on the state estate-tax return for decedents dying on or after April 1, 2019. An outright transfer to a surviving spouse does not require a QTIP election merely because it qualifies for the marital deduction. The state generally adds taxable gifts made within three years of death back to the gross estate under a rule that applies to qualifying estates of decedents dying through December 31, 2031, subject to statutory exceptions based on the donor's residency, the date of the gift, and the situs of real or tangible property transferred.

The state repealed its gift tax in 2000 and does not impose a separate inheritance tax on beneficiaries. State estate-tax planning requires a separate analysis from federal planning because the exclusion thresholds, portability rules, QTIP election mechanics, and three-year addback provisions differ from federal law.

A credit shelter trust holds assets at the first spouse's death in trust for the benefit of the surviving spouse and descendants. Properly structured trust assets, including post-funding appreciation, generally are not included in the surviving spouse's gross estate, although income, GST, state-tax, and basis consequences must be analyzed separately. For New York residents, the funding formula must coordinate the $15 million federal exclusion with the state's lower $7.35 million exclusion. Funding a bypass trust solely by reference to the federal amount can trigger state estate tax at the first spouse's death unless the plan uses an appropriate QTIP election or another state-tax provision.

An irrevocable trust holding a life insurance policy removes the policy's death benefit from the insured's taxable estate if structured correctly. If an existing policy is transferred to the trust and the insured dies within three years, IRC Sections 2035 and 2042 may cause the proceeds to be included in the insured's gross estate. A policy acquired initially by the trust avoids that transfer issue if the insured retains no incidents of ownership. Contributions used to pay premiums may qualify for the annual exclusion only if they constitute present-interest gifts, typically through properly administered withdrawal rights with consistent notice procedures.

A charitable remainder trust pays income to a non-charitable beneficiary for a term of years or for life, with the remainder passing to charity at termination. The grantor receives a partial charitable income-tax deduction at contribution based on the present value of the charitable remainder interest, and the trust must satisfy IRC §664 and the remainder-interest requirements of §2055(e). A charitable lead trust reverses this structure, paying income to charity first, and may generate a gift or estate-tax deduction for the value of the charitable income stream under §2055(e)(2)(B) and, for lifetime transfers, §§170(f)(2)(B) and 2522(c)(2)(B) as applicable. Both structures involve actuarial calculations that depend on the applicable interest rate at formation.

Form 706 generally must be filed when the decedent's federal gross estate, increased by adjusted taxable gifts and any applicable specific gift-tax exemption, exceeds the $15 million filing threshold for 2026. An estate below the mandatory filing threshold must timely file a complete Form 706 to elect portability of the deceased spouse's unused exclusion, subject to available late-election relief. A New York resident estate generally must file Form ET-706 when the federal gross estate plus includible gifts exceeds $7.35 million. A nonresident estate may have to file if the decedent owned real or tangible personal property located in the state and the same threshold test is met. Both returns are generally due nine months after death, and an extension of time to file does not automatically extend the time to pay the tax. Form 709 is due April 15 of the year following the gift.

Documentation requirements differ by deduction type. Debts and administration expenses claimed on Form 706 require account statements, invoices, receipts, court filings, and fee agreements. A charitable bequest under IRC Section 2055 is reported on Form 706 Schedule O and requires the governing instrument, probate documentation where applicable, and support for the value of the asset in the gross estate. Lifetime charitable contributions claimed as income-tax deductions may require contemporaneous written acknowledgment, Form 8283, and a qualified appraisal under IRC Section 170(f)(11). A gift tax planning strategy that relies on valuation discounts for closely held interests requires a defensible appraisal prepared by a qualified appraiser before the return is filed.