Estate tax is a federal tax on the total value of money and property someone leaves behind when they die

The federal government taxes large estates — but only if the estate exceeds a threshold amount set by law. That threshold changes every year and is much higher than most people's total assets. In 2024, for example, the federal estate tax applies only to estates worth more than $13.61 million. Most people never pay it because their estates fall below that line.

When an estate does owe federal tax, the executor (the person managing the estate) must file a tax return with the IRS and pay the tax before distributing money to heirs. Some states also have their own estate taxes with lower thresholds, so a person might owe state tax even if the federal threshold is not reached.

Estate tax is separate from income tax. Heirs do not pay income tax on money they inherit, but the estate itself may owe tax on its total value before that money reaches them.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, and that threshold rises each year.
  • Some states impose estate tax at much lower thresholds, so you may owe state tax even if federal tax does not apply.
  • The executor of an estate files the tax return and pays any tax owed before heirs receive their inheritance.
  • Heirs do not pay income tax on inherited money, but the estate may owe tax on its total value before distribution.

How the federal threshold works and why it matters

The amount at which federal estate tax kicks in is called the exemption. In 2024, each person can leave up to $13.61 million to heirs without triggering federal estate tax. A married couple can combine their exemptions, so together they can leave up to $27.22 million tax-free.

This threshold is not permanent. Congress set it to drop back to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless new legislation changes it. That means an estate worth $10 million might owe no tax in 2024 but could owe tax in 2026 if the law does not change.

Because the threshold is so high, federal estate tax affects only about 0.1% of estates in any given year. Most people who worry about estate planning are concerned about state taxes, probate costs, or how to divide assets fairly — not federal estate tax itself.

State estate taxes and inheritance taxes

Twelve states and the District of Columbia have their own estate taxes. These state-level taxes use much lower thresholds than the federal government. Massachusetts, for example, taxes estates worth more than $1 million. Oregon taxes estates over $1 million. New York taxes estates over $6.94 million (as of 2024). The tax rates and thresholds vary by state and change annually.

Six states also have inheritance taxes, which work differently: instead of taxing the estate itself, they tax the heirs based on what they receive and their relationship to the deceased. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all use inheritance tax systems. A spouse or child might pay nothing, while a distant relative could owe tax on the same inheritance.

If you live in or own property in a state with an estate or inheritance tax, the executor must file a separate state return and pay that tax even if the federal threshold is not met.

What counts as part of an estate for tax purposes

An estate includes everything a person owned at death: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, vehicles, and personal property. It also includes the value of certain gifts made within three years of death in some cases.

Some assets pass outside the estate and do not count toward the tax threshold. These include money in a payable-on-death bank account (which goes directly to the named beneficiary), life insurance proceeds if the policy names a beneficiary other than the estate, and assets held in a living trust. Retirement accounts with named beneficiaries also pass directly to those beneficiaries and do not go through the estate.

The executor and any tax professional working on the estate must identify which assets are part of the taxable estate and which bypass it. This affects both the total tax owed and the timeline for settling the estate.

How estate tax is calculated and paid

If an estate exceeds the exemption threshold, the tax is calculated on the amount over the limit. The federal estate tax rate is a flat 40% on the taxable portion. So if an estate is worth $14 million and the exemption is $13.61 million, the taxable amount is $390,000, and the tax owed is $156,000.

The executor files IRS Form 706 (the federal estate tax return) within nine months of death. Some estates can request an extension, but the tax is still due within that nine-month window. The executor must pay the tax from estate assets before distributing money to heirs.

If the estate does not have enough liquid cash to pay the tax, the executor may need to sell assets — sometimes at unfavorable prices or timing. This is one reason people with large estates often use trusts or life insurance strategies during their lifetime to reduce the tax burden on their heirs.

Strategies people use to reduce estate tax

People with estates near or above the exemption threshold often work with an attorney or financial planner to reduce what their heirs will owe. Common approaches include setting up a revocable living trust (which does not reduce taxes but can simplify the process), making annual gifts to family members (which reduces the estate's size), or using an irrevocable life insurance trust to keep life insurance proceeds out of the taxable estate.

Married couples can use portability, which allows the surviving spouse to use the deceased spouse's unused exemption. This requires filing a federal estate tax return even if no tax is owed, so the unused exemption is preserved.

These strategies work best when planned years in advance, not after someone has died. An executor cannot reduce an estate's tax burden retroactively, so the time to consider these options is while the person is still living.

Frequently Asked Questions

Do heirs have to pay estate tax on money they inherit?

No. Heirs do not pay income tax on inherited money. The estate itself may owe estate tax on its total value, but that tax is paid from the estate before heirs receive their share. Heirs receive their inheritance tax-free.

What if an estate is worth $13 million — does it owe federal tax?

No. In 2024, the federal exemption is $13.61 million, so an estate worth $13 million is below the threshold and owes no federal tax. However, check your state's rules — some states tax estates at much lower amounts.

Can an executor reduce estate tax after someone dies?

No. Estate tax planning must happen before death. Once someone has died, the estate's value is fixed, and the executor cannot use strategies like gifting or trusts to lower the tax. This is why people with large estates often plan ahead.

What happens if the estate cannot pay the tax?

The executor may need to sell estate assets to raise cash for the tax bill. If the estate is illiquid (most value is in real estate or a business), this can force a sale at unfavorable timing. Life insurance or other planning during life can prevent this situation.

Will the federal exemption stay at $13.61 million?

No. The exemption is set to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress passes new legislation. This means estates that owe no tax in 2024 could owe tax in 2026 if the law does not change.