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

The federal estate tax applies only to estates above a certain value. For 2024, that threshold is $13.61 million per person. If your estate is worth less than that amount, no federal estate tax is owed, regardless of who inherits it or how the property is divided.

The tax is paid from the estate itself before money and property go to heirs. The executor of the estate — the person named in the will to handle the estate — is responsible for filing the federal estate tax return (Form 706) with the IRS if the estate exceeds the threshold. The estate pays the tax from its assets, which can mean heirs receive less than they would have otherwise.

This threshold changes every year and is set by Congress. It was much lower in the past — in 2000 it was $675,000 — and it is scheduled to drop back to roughly $7 million per person in 2026 unless Congress acts. The threshold also varies by state; some states have their own estate taxes that kick in at lower amounts.

Key Takeaways

  • The federal estate tax only applies to estates worth more than $13.61 million in 2024, so most people do not owe it.
  • The threshold is scheduled to drop to approximately $7 million per person in 2026 unless Congress changes the law.
  • Married couples can combine their thresholds, meaning a couple can leave up to $27.22 million in 2024 without owing federal estate tax.
  • The tax rate on amounts above the threshold is 40 percent, and the estate pays it before heirs receive their inheritance.
  • State estate taxes and inheritance taxes operate separately from the federal tax and have their own lower thresholds in some states.

How the tax rate and calculation work

The federal estate tax rate is a flat 40 percent on the value of the estate that exceeds the threshold. This is a single rate, not a graduated scale like income tax. If an estate is worth $14 million in 2024, only the $390,000 above the $13.61 million threshold is taxed, and the tax owed would be $156,000.

The calculation includes the full value of the estate: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and business interests. Some items are valued at their fair market value on the date of death; others may be valued on an alternate date six months after death if that produces a lower value and the executor chooses it.

Certain deductions reduce the taxable estate. A surviving spouse can inherit an unlimited amount tax-free through the marital deduction. Charitable donations made through the estate also reduce the taxable amount. These deductions can significantly lower or eliminate the tax owed.

Who actually pays the federal estate tax

Very few people pay this tax. In recent years, fewer than one in 1,000 estates owe federal estate tax because the threshold is so high. The tax primarily affects people with substantial wealth: owners of large businesses, significant real estate holdings, investment portfolios worth millions, or life insurance policies with large death benefits.

The executor pays the tax from estate assets, which means the money comes out before heirs receive their inheritance. If the estate does not have enough liquid cash, the executor may need to sell property or investments to raise the funds. This can delay the distribution of the estate to heirs by several months.

Some heirs may owe income tax on inherited retirement accounts or investment income generated by the estate during the settlement process, but that is separate from the federal estate tax and works under different rules.

The difference between federal estate tax and state taxes

Twelve states plus Washington, D.C. have their own estate taxes, and six states have inheritance taxes. These operate independently of the federal tax and often have much lower thresholds. Massachusetts, for example, has a state estate tax threshold of $1 million. Oregon's threshold is $1 million. New Jersey's inheritance tax applies to certain heirs regardless of the estate size.

An estate can owe both federal and state taxes. A $5 million estate in Massachusetts would owe no federal tax but would owe Massachusetts state estate tax on the amount above $1 million. The executor must file separate returns with each state that has a tax claim on the estate.

Some states offer credits or deductions for federal estate tax paid, which can reduce the total state tax owed. The rules vary significantly by state, so the executor should consult with a tax professional familiar with the state where the deceased lived and owned property.

How the threshold changes affect planning

The current high threshold of $13.61 million per person is temporary. It was set by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire on December 31, 2025. Starting January 1, 2026, the threshold is set to drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it.

This scheduled change creates planning considerations for people with estates in the $7 million to $13.61 million range. Some may want to make large gifts to family members or charities before 2026 to reduce their estate below the lower threshold. Others may want to set up trusts or other structures to manage the tax impact. These decisions require consultation with an estate planning attorney or tax professional.

Congress could also raise, lower, or eliminate the threshold entirely. The threshold has changed multiple times in the past based on which party controlled Congress and the White House. Anyone with a substantial estate should review their plan periodically, especially around major legislative changes.

Frequently Asked Questions

Does the federal estate tax apply to life insurance?

Yes, life insurance proceeds are included in the taxable estate if the deceased owned the policy or had control over it at death. However, life insurance owned by a trust or another person is not included in the deceased's estate. Many people use life insurance trusts specifically to keep the proceeds out of the taxable estate.

Can I give money to my children now to avoid estate tax later?

Yes, but there are limits. You can give up to $18,000 per person per year (in 2024) without using any of your lifetime threshold. Larger gifts use up your lifetime threshold, which is the same pool as your estate tax threshold. Gifts and estate amounts combined cannot exceed $13.61 million in 2024 without owing tax.

What happens if my estate is worth exactly the threshold amount?

No federal estate tax is owed if the estate equals the threshold. Tax is only owed on the amount that exceeds it. If your estate is worth $13.61 million in 2024, you owe nothing. If it is worth $13.62 million, you owe 40 percent of the $10,000 excess, which is $4,000.

Do I need to file an estate tax return if my estate is below the threshold?

Generally no, but there are exceptions. If the estate received income during the settlement process or if the deceased made large gifts during life, a return may be required even if no tax is owed. The executor should consult a tax professional to determine whether filing is necessary.

How long does it take to settle an estate and pay the tax?

The IRS typically has nine months from the date of death to assess the estate tax, though extensions are common. The full settlement process often takes one to two years depending on the complexity of the estate, whether there are disputes, and how quickly assets can be valued and sold if needed.