Clients come in with very different starting assumptions about estate tax. Some are convinced the IRS will take half of everything. Others assume Michigan has its own tax that no one ever mentions. The truth is more boring and, for most families, more reassuring. The vast majority of estates in this country never file an estate tax return at all. The work that does matter is in the smaller, less famous taxes and in the tax-driven design of the plan itself.
Michigan, the part that often surprises people
Michigan does not impose its own estate tax. Michigan does not impose an inheritance tax either. Both taxes existed historically, but they were repealed years ago. For someone passing away as a Michigan resident, the only estate tax to think about is the federal one.
That is a meaningful advantage compared to states that still have their own estate tax with a much lower exemption than the federal one. It means a Michigan family can plan around the federal rules without also navigating a separate state regime. It also means Michigan attracts retirees from states where the local estate tax bites well below the federal threshold.
If your total estate, including life insurance and retirement accounts, is under the federal exemption, you will not owe federal estate tax, and Michigan has no separate estate or inheritance tax of its own.
The federal estate tax in 2026
Federal estate tax applies only to estates above the federal exemption amount. The exemption is large by historical standards. For 2026, the exemption is indexed for inflation and is set to revert to a lower level under current law unless Congress acts. The exact figure matters for planning, so we always confirm it with current IRS guidance for any client whose estate is close to the line.
Some headline points that hold steady regardless of where the exemption is set in any given year:
- The exemption is per person. A married couple can combine their two exemptions with proper planning.
- An unlimited marital deduction generally allows a deceased spouse to leave any amount to a surviving U.S. citizen spouse without federal estate tax.
- An election called portability lets a surviving spouse use what the deceased spouse did not use, but the election must be made on a timely-filed estate tax return. Missing this filing is one of the most common, and most expensive, mistakes for moderately sized estates.
- For estates above the exemption, the top federal estate tax rate is currently 40 percent on the amount over the threshold.
What actually counts toward the estate
Clients often underestimate the size of their taxable estate because they think of "the estate" as the things that pass under the will. For federal estate tax purposes, almost everything counts. That includes:
- Real estate, inside and outside of Michigan
- Retirement accounts at full value, not the after-tax value
- Life insurance, when the deceased owned the policy
- Investment accounts, brokerage and otherwise
- Business interests, at fair market value
- Tangible personal property of meaningful value
- Certain gifts made during life that exceed the annual exclusion
The retirement account piece catches people. A couple with a modest house and what they consider a routine 401(k) and IRA can find that, when added together with life insurance, they are closer to the exemption than they thought.
Gift tax, the cousin no one expects
Federal law also imposes a gift tax on transfers during life. In practice, very few families pay gift tax. That is because of two important rules.
The first is the annual exclusion. Each year, a person can give a certain amount to as many other people as they like without using any of their lifetime exemption and without filing anything. A married couple can effectively double that amount per recipient. The exact figure is indexed for inflation each year.
The second is that gifts above the annual exclusion are not taxed immediately. They use up some of the same lifetime exemption that applies to estate tax. A gift tax return is required to report them, but no tax is owed until the lifetime exemption is exhausted. This is the engine behind most lifetime gifting strategies for larger estates.
The other tax that quietly matters, GST
The generation-skipping transfer tax is the third leg of the federal transfer tax system. It exists to prevent families from skipping a generation, leaving wealth to grandchildren or further descendants, without paying tax at each level. The exemption from GST is the same as the estate tax exemption for most planning purposes, but it has to be allocated affirmatively, and missed allocations are a common and costly mistake. If your plan includes generational trusts, GST planning is part of the picture.
The income tax angle most attorneys do not talk about enough
For families below the federal estate tax exemption, the most valuable single piece of estate tax planning is not avoiding the federal estate tax. It is the income tax basis step-up at death.
When someone passes away owning an appreciated asset, real estate, a stock account, a business interest, the heirs typically receive the asset with a new income tax basis equal to the fair market value at the date of death. The built-in capital gain disappears. If the heirs sell the asset shortly afterward, they pay little to no capital gains tax.
This is why aggressive lifetime gifting of appreciated assets is often a bad idea for families well under the federal exemption. The gift uses none of the lifetime exemption that would otherwise be wasted, and it permanently transfers a low basis to the recipient. A different design, holding the asset until death, often saves the family more money than any estate tax planning would have.
When families do owe estate tax, and what to do about it
For families with significant business holdings, real estate portfolios, or sizable retirement and life-insurance positions, the federal estate tax is a real concern, especially given the scheduled change in the exemption amount. Tools that come into play in that range include:
- Spousal lifetime access trusts, often called SLATs, that use the lifetime exemption while preserving indirect access
- Irrevocable life insurance trusts, or ILITs, that keep insurance proceeds outside the taxable estate
- Family limited partnerships and LLCs, often used to gift business or real-estate interests at supportable discounted values
- Charitable remainder and charitable lead trusts, when philanthropy is part of the family's intent
- Grantor retained annuity trusts, or GRATs, for transferring appreciation on assets expected to grow
These tools are technical and have to be drafted and administered carefully. A poorly built SLAT can defeat itself. A casually run FLP can be unwound by the IRS. The work is real and worth doing, but it has to be done with care.
Common situations in our practice
Business owners
If you own a business that has grown in value, the planning conversation has to consider succession, liquidity for any estate tax that may be owed, and what happens to the company if the unexpected happens. The estate plan and the business plan are the same plan.
Families with appreciated real estate
Vacation property, rental real estate, and family land are common reasons a family's net worth exceeds what they think it does, and they are areas where the basis step-up is most valuable. We coordinate the deed, the trust, and any LLC structure so the tax outcome matches the family outcome.
Mid-Michigan retirees moving from a high-tax state
Several of our clients moved to mid-Michigan from states that still have their own estate or inheritance tax. The move itself is often the single most valuable piece of estate tax planning. We help with the small but important steps to actually establish Michigan domicile so the tax position holds up.
The short version
- Michigan does not impose its own estate or inheritance tax.
- Federal estate tax applies only to estates above the federal exemption, which is large by historical standards and is scheduled to change.
- Almost everything you own counts toward the taxable estate, including retirement accounts and life insurance you own.
- Gift tax very rarely produces an actual tax bill, but it requires reporting above the annual exclusion.
- For most families, the income tax basis step-up at death is the most valuable single piece of planning.
- For families above the exemption, careful trust-based planning can save very large amounts.
If you would like a clear, written assessment of where your family actually sits relative to the federal exemption and what, if anything, your plan should do about it, schedule a consultation. We are direct about what is and is not worth doing.