The person who settles the estate pays the tax, not the heirs

Estate tax is paid by the estate itself before money or property goes to heirs. The person handling the estate — called the executor or personal representative — uses estate assets to pay the tax bill to the IRS. This happens before any inheritance reaches the people named in the will.

In practice, this means heirs often receive less than the will specifies because the estate's cash or liquid assets go toward the tax first. If the estate does not have enough cash on hand, the executor may need to sell property, investments, or other assets to cover the bill.

The executor is legally responsible for filing the estate tax return (Form 706) with the IRS and paying what is owed. If they do not pay, the IRS can pursue the estate and its assets. Some states also require a state estate tax return to be filed separately.

Key Takeaways

  • The estate pays the federal tax bill, not the individual heirs, using money or assets from the estate itself.
  • Only estates larger than the federal threshold (which changes yearly and was $13.61 million in 2024) owe federal estate tax.
  • The executor or personal representative is responsible for calculating, reporting, and paying the tax to the IRS.
  • Some states impose their own estate or inheritance tax on top of federal tax, with lower thresholds than the federal level.
  • If the estate does not have enough liquid cash, the executor may sell property or investments to pay the bill.

Federal estate tax only applies to large estates

Most estates do not owe federal estate tax because the threshold is very high. In 2024, only estates worth more than $13.61 million trigger federal tax. This amount changes each year based on inflation and is set by Congress.

Because the threshold is so high, fewer than 1 in 1,000 estates nationwide owe federal tax in any given year. If an estate falls below the threshold, no federal estate tax return is required and no federal tax is due — even though the executor may still need to file other paperwork with the probate court.

The threshold is scheduled to drop significantly after 2025 unless Congress acts. Starting in 2026, the limit is set to fall to roughly $7 million per person (adjusted for inflation), which would affect more estates. This change is important to know if you are planning an estate or managing one that is close to the current threshold.

State estate and inheritance taxes work differently

Twelve states and Washington, D.C. impose their own estate tax, and six states impose an inheritance tax. These are separate from federal tax and often have much lower thresholds, meaning smaller estates may owe state tax even if they owe nothing to the IRS.

State estate tax is paid the same way as federal tax — the executor uses estate assets to pay the state tax bill before distributing money to heirs. The state tax return is filed separately from the federal return, usually with the state's department of revenue or tax authority.

Inheritance tax works slightly differently: it is sometimes paid by the heirs themselves rather than the estate, depending on the state and the heir's relationship to the deceased. A few states tax all heirs equally, while others tax distant relatives at higher rates than spouses or children. You can find which states have these taxes and their thresholds through your state's tax authority website.

How the executor pays the tax bill

The executor's first step is to determine the estate's total value, which includes real estate, bank accounts, investments, vehicles, and personal property. They report this value on Form 706 (the federal estate tax return) if the estate exceeds the threshold. The IRS uses this form to calculate how much tax is owed.

Once the IRS issues a bill, the executor pays it from estate funds. Most executors pay from the estate's bank account or by liquidating investments. If the estate is mostly real property — such as a house or land — and has little cash, the executor may need to sell some of that property to raise the money.

The executor can also use life insurance proceeds if the policy is payable to the estate. Some estates set aside life insurance specifically for this purpose. The executor must keep detailed records of all payments and file them with the probate court as part of their final accounting.

What happens if the estate does not have enough money

If estate assets are not sufficient to cover the tax bill, the executor faces a difficult choice. They can sell property, liquidate investments, or borrow against estate assets. In some cases, heirs may need to contribute money to cover the shortfall, though this is not common and depends on state law and the will's terms.

The executor cannot simply ignore the bill or delay payment indefinitely. The IRS charges interest and penalties on unpaid estate tax, which grows over time. If the executor fails to pay, the IRS can place a lien on estate property and pursue collection against the executor personally in some situations.

This is one reason why people with large estates sometimes purchase life insurance or set up trusts during their lifetime — to ensure there is enough liquid cash available to pay taxes without forcing the sale of family property or businesses.

How estate planning can reduce what heirs owe

People with estates near or above the federal threshold sometimes use legal strategies to reduce the tax burden. These include setting up trusts, making gifts during their lifetime (which use a separate lifetime gift tax exemption), or leaving money to a spouse or charity (which may be tax-free under certain rules).

A trust can hold assets in a way that removes them from the taxable estate, meaning the executor does not have to pay tax on that money. Charitable donations in a will also reduce the taxable estate. These strategies must be set up before death and require working with an estate attorney or tax professional.

The executor does not make these decisions — they are made by the person writing the will or trust during their lifetime. Once someone has died, the executor must follow the will or trust as written and pay whatever tax is legally owed based on the estate's structure.

Frequently Asked Questions

Can heirs refuse to accept an inheritance to avoid paying estate tax?

No. Estate tax is paid by the estate before heirs receive anything, so heirs do not pay it directly. However, heirs can refuse an inheritance (called a disclaimer), which means that money goes to the next person named in the will. This does not reduce the estate tax owed.

What if someone dies without a will — who pays the estate tax?

The court appoints an administrator (similar to an executor) to manage the estate and pay taxes owed. The process is the same: estate assets are used to pay the tax bill before any money goes to heirs under state intestacy law.

Does the executor have to pay estate tax out of their own pocket?

No. The executor uses only the estate's money and assets to pay the tax. If the executor pays from their personal funds, they can seek reimbursement from the estate. The executor is not personally liable for the tax unless they mishandle estate funds or fail to file required returns.

Can estate tax be paid in installments?

Yes, in limited situations. If the estate includes a family business or farm, the IRS allows payment in installments over up to 14 years. This requires filing a specific election on the estate tax return. Most other estates must pay the full bill within nine months of death.

Who pays state estate tax if the person lived in one state but owned property in another?

The executor must file and pay tax in the state where the person lived at death (their domicile). If property is located in another state that also has estate tax, additional tax may be owed there. This is one reason estates with property in multiple states need careful planning.