Estate tax is a federal tax on the total value of everything a person owns when they die
When someone dies, the federal government may tax their estate — the money, property, investments, and possessions they leave behind. Not every estate pays this tax. The tax only applies if the total value exceeds a threshold set by federal law. That threshold changes every year and is much higher than most people's estates, which is why most families never pay federal estate tax.
The executor or personal representative of the estate is responsible for calculating whether the estate owes tax, filing the required form with the IRS, and paying any amount due before distributing money and property to heirs. The tax is paid from the estate itself, not by the people who inherit.
State-level estate taxes and inheritance taxes work differently and have lower thresholds in some states. A few states tax estates, and a few others tax the people who receive inheritances. These operate separately from federal estate tax.
Key Takeaways
- Federal estate tax only applies when the total value of an estate exceeds the federal threshold, which was $13.61 million per person in 2024 and changes yearly.
- The executor must file Form 706 with the IRS if the estate exceeds the threshold, even if no tax is owed, within nine months of death.
- Some states impose their own estate or inheritance taxes with much lower thresholds, so you may owe state tax even if federal tax does not apply.
- Married couples can combine their thresholds through portability, potentially doubling the amount that passes tax-free to heirs.
- Certain assets like life insurance proceeds, retirement accounts with named beneficiaries, and property held in trusts may be treated differently for tax purposes.
The federal threshold and how it changes
The amount of an estate that is exempt from federal tax — called the federal exemption — is set by law and adjusted each year for inflation. In 2024, each person could pass $13.61 million to heirs without owing federal estate tax. In 2025, that amount increased to $13.99 million. These numbers change annually based on a formula tied to the cost of living.
This threshold is temporary. Under current law, it is scheduled to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress changes the law. That change would affect estates created or modified after that date.
Because the threshold is so high, fewer than one in every 1,000 estates owe federal tax in any given year. Most people can pass their entire estate to their heirs without any federal estate tax bill.
How the tax is calculated and paid
If an estate does exceed the threshold, the tax rate is 40 percent on the amount over the limit. For example, if an estate is worth $14 million and the exemption is $13.61 million, the taxable amount is $390,000, and the tax owed would be $156,000.
The executor files Form 706 (United States Estate Tax Return) with the IRS within nine months of the person's death. The form lists all assets, their values, any debts, and deductions. The IRS reviews the return and either accepts the values or challenges them. If the estate owes tax, payment is due by the filing deadline, though the executor can request an extension.
The tax is paid from estate funds before heirs receive their inheritance. If there is not enough liquid money (cash or easily sold assets), the executor may need to sell property or investments to cover the bill.
State estate and inheritance taxes
Seventeen states and the District of Columbia impose their own estate taxes, separate from federal tax. These state-level taxes have much lower thresholds — often between $1 million and $6 million — so an estate might owe state tax even if it does not owe federal tax.
Six states impose inheritance taxes instead, which tax the people who receive the inheritance rather than the estate itself. The tax rate and amount owed depend on who inherits (spouses and children often pay less or nothing) and how much they receive.
If you live in or own property in a state with an estate or inheritance tax, you should check that state's rules. The threshold, tax rate, and filing requirements differ from state to state.
Portability for married couples
When a married person dies, their unused exemption can transfer to the surviving spouse through a process called portability. This means if one spouse dies and uses only part of their exemption, the surviving spouse can use both their own exemption and the deceased spouse's unused portion.
For example, if one spouse dies in 2024 with a $13.61 million exemption and leaves only $5 million to heirs, the $8.61 million unused exemption can pass to the surviving spouse. The surviving spouse then has access to $13.61 million (their own) plus $8.61 million (from their deceased spouse), for a total of $22.22 million.
To use portability, the executor must file Form 706 even if the estate does not owe tax. Filing preserves the unused exemption for the surviving spouse. Without the filing, that unused exemption is lost.
Assets treated differently for estate tax
Not all assets are counted the same way for estate tax purposes. Life insurance proceeds are included in the estate if the deceased person owned the policy or had control over it, even though they pass directly to beneficiaries outside of probate. Retirement accounts like IRAs and 401(k)s are included at their full value, even though they have named beneficiaries.
Property held in a revocable living trust is included in the estate because the person retained control during their lifetime. Property in an irrevocable trust may not be included if the person gave up all control and ownership. Jointly owned property is usually included at half its value (or full value if one owner is a spouse).
Some gifts made during a person's lifetime can reduce the taxable estate. Annual gifts up to a certain amount per recipient ($18,000 per person in 2024) do not count against the exemption. Larger gifts may use up part of the exemption but do not trigger a tax payment during the person's lifetime.
What happens if the estate does not file
If an estate exceeds the threshold and the executor does not file Form 706, the IRS can assess penalties and interest. The penalties are steep — starting at 5 percent per month of the unpaid tax, up to 25 percent of the total.
The IRS has the authority to go back and calculate what was owed, even years after the person's death. Heirs may be held responsible for unpaid taxes if the executor did not file. Filing the return, even if no tax is owed, protects the estate and preserves portability for a surviving spouse.
Frequently Asked Questions
Do I have to pay estate tax if I inherit money?
No. The estate itself pays federal estate tax, not the people who inherit. The tax is paid from the estate's assets before money is distributed to heirs. Some states have inheritance taxes that do tax the heirs directly, but this depends on which state you live in and which state the deceased person lived in.
What if my estate is worth less than the threshold?
If the total value is below the federal exemption, no federal estate tax is owed. The executor still may need to file Form 706 if the estate is close to the threshold or if a surviving spouse wants to preserve unused exemption through portability. Check your state's rules too — some states have lower thresholds.
Can I reduce my estate tax by giving money away before I die?
Yes. Gifts during your lifetime do not trigger a tax payment, and annual gifts up to $18,000 per person (in 2024) do not count against your exemption. Larger gifts use up part of your exemption but still do not require you to pay tax. This strategy works best with the help of an estate planning attorney.
What if the threshold drops in 2026?
If Congress does not change the law, the exemption will drop to roughly $7 million per person on January 1, 2026. Estates between the old and new thresholds would then owe tax. People with large estates sometimes make large gifts before the deadline to use the higher exemption while it is still in effect.
How long does it take to file Form 706?
The deadline is nine months after death. The executor can request a six-month extension if needed. The time to actually prepare and file the form depends on how complex the estate is — simple estates may take a few weeks, while estates with many assets, business interests, or real property in multiple states can take several months.