Somewhere in your head is a sentence that goes: estate tax is for the rich. I'm not rich. That's not my problem. It's a comfortable sentence, and for the federal government it's mostly true. For your state, it may not be.
The federal exemption is large. For 2026 it is $15 million per person, and it is indexed to inflation after that. A few states don't use that number at all. Oregon's estate tax threshold is $1 million. Massachusetts's is $2 million. A solo founder with a paid-off house, a retirement account, a life insurance policy, and a business that throws off steady revenue can cross those lines without ever feeling wealthy.
Your family would find out nine months after the funeral, when the return comes due.
Why the number in your head is the wrong number
People estimate their taxable estate by thinking about cash. The IRS and state revenue departments think about everything you owned or controlled at death, valued at fair market value.
That includes:
- The business itself, at what a willing buyer would pay, not what you paid or what it earned last year
- Retirement accounts, such as the solo 401(k) or SEP-IRA
- Real estate, valued at market rather than purchase price
- Life insurance, if you owned the policy or had incidents of ownership in it. Many people assume insurance sits outside the estate. It doesn't always.
- Brokerage accounts, vehicles, and domain portfolios with real resale value
Add those up honestly. A software business that sells for three times annual profit, plus a home with years of appreciation, plus a retirement balance, plus a $1 million term policy you own, gets to a state threshold quickly.
Estate tax is also not the same as inheritance tax. Estate tax is paid by the estate before heirs receive anything. Inheritance tax is paid by the recipients. A handful of states have the second kind, and a few have both. The rules and thresholds differ by state and change with legislation, so check your own state's current revenue department figures rather than trusting a blog post, this one included.
The part that surprises people: it's usually not portable
At the federal level, a surviving spouse can claim the unused portion of a deceased spouse's exemption, an election called portability. It requires filing a federal estate tax return (Form 706) even when no federal tax is owed. Many families skip that return because "we're nowhere near the limit," and lose the option.
Most states with their own estate tax do not offer an equivalent. If your plan leaves everything to a spouse, the state tax may be deferred through the marital deduction. But when the surviving spouse later dies, only one state exemption applies to the combined assets. Some couples use trusts, such as a credit shelter or bypass trust, to use the first spouse's state exemption instead of wasting it. Whether that makes sense depends on your state and your assets, and it's a real conversation to have with an estate attorney.
Why this hits business owners harder than salaried people
An employee with a $2 million estate probably holds that wealth in a house and retirement accounts. A business owner holds it in something that can't be quickly turned into a check.
The tax return is due nine months after death, with an extension available for filing. The payment is generally due on the same schedule. If the estate's value is mostly a business that the executor can't legally touch yet, can't easily sell, and may not understand, there is a gap between what is owed and what is liquid.
That gap forces bad choices: a rushed sale to whoever shows up first, a fire-sale of the one asset with sentimental value, or borrowing against an estate that has no signatory.
There is a federal provision worth knowing about, Section 6166, which lets the estate of a closely held business owner pay the federal estate tax attributable to the business in installments over a number of years, when the business makes up more than 35% of the adjusted gross estate. It's a federal rule with specific requirements, and it doesn't automatically carry over to states. Its existence is a hint, though: lawmakers recognized that taxing illiquid businesses on a nine-month clock is a problem. You shouldn't count on the relief without planning for it.
One piece of good news: the step-up in basis
Under IRC Section 1014, assets that pass at death generally receive a new tax basis equal to their fair market value on the date of death (or, if the estate elects it, an alternate date six months later). If your business has appreciated enormously, your heirs typically don't owe capital gains tax on that built-in growth if they sell soon after.
That's why valuation matters twice. A high valuation raises your estate tax exposure. A high valuation also raises your family's basis, which lowers the gain they'd report if they sell. A defensible, documented valuation is not just an accounting exercise. It's a tool.
Your next moves
- Look up your state's estate and inheritance tax threshold today. Search "[your state] estate tax exemption" and go to the state revenue department site. Write the number down. If your state has no estate or inheritance tax, you can stop worrying about this part of the plan.
- Build a rough net worth statement with fair market values. Include the business at a conservative estimate, real estate at current market, retirement accounts, insurance policies you own, and any digital assets with resale value. Ten honest minutes with a spreadsheet beats years of guessing.
- Check who owns your life insurance policy. Log into the insurer's portal or find the declarations page. If you are both the insured and the owner, ask an estate attorney whether an irrevocable life insurance trust (ILIT) is worth considering. This is a classic fix, but it has timing rules.
- Estimate your nine-month cash need. If the number from step 2 is above your state threshold, ask an attorney or CPA to calculate the approximate tax. Then compare it to the liquid cash and insurance proceeds available. The difference is your gap.
- Book one consult with an estate attorney in your state. Bring your net worth statement and ask three questions: Do I need a trust to use both spouses' exemptions? Should I file for portability? How would my executor pay a tax bill if the business can't be sold quickly?
Where this fits in a death binder
Estate tax is the one part of a plan that has a hard deadline attached, and the people who miss it are usually the ones who didn't know where anything was. Your executor can't file a return on assets they can't find, or value a business whose records live in logins they can't reach.
That's the quiet job a well-built binder does. Heirloom keeps the vault, the handoff instructions, and the beneficiary details in one place, so when someone has to assemble a valuation and a tax return on a nine-month clock, they're working from your records instead of a scavenger hunt. If you'd like to see how that looks for a solo founder, you can start at heirloom.lumenlabs.works.