The person or entity handling the estate pays the tax, not the heirs
Estate tax is paid by the estate itself — the collection of money, property, and assets left behind — before anything goes to the people who inherit. The executor or administrator of the estate (the person named in the will or appointed by the court) is responsible for calculating what is owed, filing the tax return with the IRS, and paying from estate funds. The heirs receive what is left after taxes, debts, and expenses are settled.
This matters because it changes who bears the cost. If an estate owes $500,000 in federal estate tax and the estate has $2 million in assets, the executor pays that $500,000 from the estate's bank accounts or by selling assets. The heirs then split the remaining $1.5 million. The tax does not come out of each heir's pocket separately — it comes out of the shared pot first.
Not all estates owe federal estate tax. The tax only applies to estates larger than a certain threshold, which changes every year. For 2024, federal estate tax applies only to estates worth more than $13.61 million. Most people's estates fall below this amount and owe nothing to the IRS.
Key Takeaways
- The estate itself pays federal estate tax, not individual heirs, and the executor handles the payment from estate funds before distribution.
- Federal estate tax only applies to estates exceeding $13.61 million in 2024, so most estates owe no federal tax at all.
- Some states impose their own estate or inheritance taxes on smaller amounts, and those are also paid from the estate before heirs receive their share.
- The executor must file a federal estate tax return (Form 706) if the estate is large enough, even if no tax is ultimately owed.
- Debts, funeral costs, and administrative expenses are paid from the estate before taxes, which can reduce the taxable amount.
How the executor pays the tax from estate funds
The executor's job includes figuring out the total value of everything the person owned at death — real estate, bank accounts, investments, vehicles, life insurance proceeds, retirement accounts, and anything else with monetary value. Once that total is known, the executor subtracts what the law allows (called deductions), which includes debts the person owed, funeral and burial costs, and administrative expenses of settling the estate.
If the remaining amount exceeds the federal threshold, the executor must file Form 706 (the federal estate tax return) with the IRS within nine months of the death. The form shows the IRS what the estate is worth and how much tax is owed. The executor then pays that amount using money from the estate — typically from a bank account, by selling stocks or property, or sometimes by taking out a loan against estate assets.
The executor keeps records of all payments and distributions. When the estate is fully settled, the executor provides each heir with a statement showing what the estate was worth, what was paid in taxes and expenses, and what each person received. This protects the executor from later disputes and shows the IRS that the tax was paid correctly.
State estate and inheritance taxes work the same way
Twelve states and the District of Columbia have their own estate taxes, separate from the federal tax. Three states have inheritance taxes (a tax on what heirs receive rather than on the estate itself). Some states have both. These state taxes are also paid from the estate before heirs receive their money.
State thresholds are much lower than the federal threshold. New York's estate tax, for example, applies to estates over $6.94 million. Massachusetts taxes estates over $1 million. Oregon taxes estates over $1 million. If someone dies with a $3 million estate and lived in Massachusetts, the state would owe tax even though the federal government would not.
The executor pays state taxes using the same process as federal tax — by filing a state return and paying from estate funds. Some states allow the executor to pay in installments if the estate includes property that is hard to sell quickly, like a family business or farm.
When heirs might end up paying instead
In rare cases, an heir can end up paying estate tax out of their own pocket. This happens when the estate does not have enough liquid money (cash or easily sold assets) to cover the tax bill, and the executor cannot or does not sell assets to raise the funds. If the executor distributes the estate to heirs before paying the tax, the IRS can pursue the heirs for the unpaid amount.
This is why executors sometimes hold back money from distributions or ask heirs to contribute to cover the tax. It is also why some families take out loans or sell property — to avoid putting heirs in this position. A well-drafted will and early planning can prevent this problem by making sure the estate has enough liquid assets or by naming a life insurance policy to cover the expected tax.
Heirs can also face state inheritance tax in the three states that impose it. In these states, the tax is technically owed by the person who inherits, not by the estate. However, the executor usually pays it from the estate before distributing to heirs, so the effect is the same — the heir receives less than they would have otherwise.
How life insurance and trusts affect who pays
Life insurance proceeds are included in the estate's value for tax purposes, but they are usually paid directly to a named beneficiary, not to the estate itself. This means the insurance money does not go through the executor's hands. However, if the policy names the estate as the beneficiary, or if the person owned the policy at death, the proceeds are part of the taxable estate and the executor must account for them.
Some people use life insurance specifically to pay estate taxes. They buy a policy large enough to cover the expected tax, name a trust as the beneficiary, and the trust uses the insurance money to pay the tax bill. This way, the heirs do not have to sell family property or deplete savings to cover the tax.
Trusts can also reduce or eliminate estate tax. A revocable living trust does not reduce taxes — assets in it are still part of the taxable estate. But an irrevocable trust can remove assets from the estate entirely, which lowers the taxable amount. These strategies require planning before death and are most useful for large estates.
The timeline for paying estate tax
The executor has nine months from the date of death to file the federal estate tax return and pay any tax owed. If the estate is complicated or the executor needs more time, they can request a six-month extension, giving them 15 months total. State deadlines vary but are usually similar.
The executor does not have to wait until the estate is fully settled to pay the tax. In fact, paying early is often wise because it stops interest and penalties from accruing. Some executors pay the tax within a few months of death, then spend the remaining time settling other estate business.
If the tax is not paid by the deadline, the IRS charges interest and penalties. The interest rate changes quarterly and is currently in the range of 8 to 9 percent per year. Penalties can add 25 percent or more to the unpaid amount. This is another reason executors prioritize paying the tax on time.
Frequently Asked Questions
Can an heir refuse to accept an inheritance to avoid paying estate tax?
No. Estate tax is paid by the estate before heirs receive anything, so refusing an inheritance does not affect the tax bill. The estate still owes the tax regardless of whether an heir accepts their share. A person can disclaim (refuse) an inheritance for other reasons, but it does not reduce estate tax.
What happens if the estate does not have enough money to pay the tax?
The executor can sell assets — stocks, real estate, vehicles, or collectibles — to raise the cash. If the estate includes a family business or farm, the executor may be able to pay the tax in installments over time rather than all at once. If the executor cannot pay, the IRS can place a lien on estate property and pursue heirs who received distributions.
Do I have to pay income tax on money I inherit?
No. Inheritances are not taxable income to the person who receives them. However, if the inherited asset later produces income — such as interest from a bank account or dividends from stocks — that income is taxable. Estate tax and income tax are separate.
Can I reduce estate tax by giving money away before I die?
Yes, but there are limits. The IRS allows you to give away a certain amount per year to other people without tax consequences. The annual limit is $18,000 per person in 2024. Amounts above that count against your lifetime gift and estate tax exemption. Large gifts require filing a gift tax return, even if no tax is owed.
Who pays estate tax if there is no will?
The court appoints an administrator (similar to an executor) to handle the estate. That administrator has the same responsibility to pay estate taxes from estate funds. The process is the same whether there is a will or not.