What the federal estate tax actually is, and who it affects

The federal estate tax is a tax on the total value of everything a person owns when they die — including real estate, bank accounts, investments, and personal property. It applies only to estates above a certain threshold. For 2024, that threshold is $13.61 million per person; estates below that amount owe no federal estate tax at all. The threshold changes yearly and is scheduled to drop significantly in 2026 unless Congress acts.

Most property owners never encounter this tax. You only file a federal estate tax return if your total estate exceeds the threshold at the time of death. State-level inheritance taxes and property taxes are separate matters and work differently — this article covers only the federal estate tax.

If your estate does exceed the threshold, the tax rate on the excess is 40 percent. That is a high rate, which is why people with large estates sometimes work with an attorney or tax professional to plan ahead. The strategies available depend on your specific situation: how much you own, whether you are married, what state you live in, and what you want to happen to your property after you die.

Key Takeaways

  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, and most property owners fall well below this threshold.
  • The threshold is temporary and scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.
  • Married couples can combine their thresholds, effectively doubling the amount that passes tax-free if one spouse dies first.
  • Common planning methods include lifetime gifts, trusts, and charitable donations, but these require legal setup and ongoing management.
  • State inheritance taxes and federal estate tax are separate; some states tax estates below the federal threshold.

How married couples can use both thresholds

If you are married, both you and your spouse have separate $13.61 million thresholds. This means a married couple can pass up to $27.22 million to their heirs without owing federal estate tax — if they plan correctly.

The key is a strategy called portability. When the first spouse dies, their unused threshold can transfer to the surviving spouse, but only if the estate files a federal estate tax return within nine months of death — even if no tax is owed. Many estates miss this deadline because they assume no return is necessary. If you miss it, you lose the unused threshold permanently.

This is why even couples with estates below the current threshold sometimes file a return: to preserve the first spouse's unused amount for later. A tax professional or estate attorney can advise whether this makes sense in your situation.

Lifetime gifts and annual exclusions

You can give away money or property during your lifetime without triggering the federal estate tax. The IRS allows you to give up to $18,000 per person per year (in 2024) without counting against your estate tax threshold. If you are married, you and your spouse can each give $18,000 to the same person, totaling $36,000 per year.

These annual gifts do not require paperwork or IRS permission — you simply give the money or property and keep a record. Over time, regular annual gifts can move a significant amount of wealth out of your taxable estate, especially if the property or investments grow in value after the gift.

Gifts larger than the annual limit do count against your $13.61 million threshold, but they do not trigger a tax immediately. Instead, they reduce the amount you can pass tax-free when you die. For example, if you give away $1 million during your lifetime, your threshold drops from $13.61 million to $12.61 million. You only owe tax if your total estate plus lifetime gifts exceed your threshold at death.

Trusts and how they can reduce estate tax

A trust is a legal document that names someone (a trustee) to manage property for beneficiaries according to your instructions. Trusts do not automatically avoid estate tax, but certain types can reduce the taxable value of your estate.

An irrevocable life insurance trust (ILIT) is one example. If you own a life insurance policy, the death benefit is included in your taxable estate. By transferring the policy into an irrevocable trust, the death benefit can pass to your beneficiaries outside your estate, reducing its taxable value. Once you transfer the policy, you cannot change the trust or take the policy back — that is what "irrevocable" means.

A may have access to personal residence trust (QPRT) lets you transfer your home to a trust while continuing to live in it for a set number of years. After that period ends, the home passes to your beneficiaries. The value counted against your estate tax threshold is reduced because you retained the right to live there during the trust term. This strategy works only if you survive the trust term; if you die before it ends, the full home value goes back into your taxable estate.

Trusts require legal setup, ongoing administration, and sometimes annual tax filings. They are most useful for people with estates well above the current threshold or those who expect the threshold to drop in 2026.

Charitable donations and charitable trusts

Donations to may have access to charities reduce your taxable estate dollar-for-dollar. If you donate $500,000 to a charity, your estate value drops by $500,000 for estate tax purposes. You also receive an income tax deduction in the year you make the donation.

A charitable remainder trust (CRT) lets you donate property to a trust while receiving income from it during your lifetime. When you die, the remaining property goes to the charity. This strategy works well if you own appreciated assets like real estate or stock: you avoid capital gains tax on the appreciation, receive an income stream, and reduce your taxable estate.

A donor-advised fund is simpler. You donate money or securities to the fund, receive an immediate tax deduction, and then recommend grants to charities over time. This gives you flexibility if you are not sure which charities to support yet, and it removes the donated amount from your taxable estate immediately.

What happens if the threshold drops in 2026

The current $13.61 million threshold is temporary. Under current law, it is scheduled to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress passes new legislation. This means estates between $7 million and $13.61 million that do not plan ahead could suddenly owe federal estate tax.

If you own property or assets worth more than $7 million, or if you expect to own that much by 2026, this deadline matters. Some people use the years before 2026 to make large gifts (which count against the higher threshold) or set up trusts. Others wait to see whether Congress changes the law. There is no single right answer — it depends on your specific situation and risk tolerance.

A tax professional or estate attorney can model what your estate tax bill might look like under different scenarios and help you decide whether planning now makes sense.

State-level inheritance and estate taxes

Twelve states and the District of Columbia have their own estate or inheritance taxes, separate from the federal tax. Some of these state taxes kick in at much lower thresholds than the federal level.

For example, Oregon has a state estate tax with a threshold of $1 million; Massachusetts has a threshold of $1 million; and Illinois has a threshold of $4 million. If you live in one of these states and your estate exceeds the state threshold, you owe state tax even if you do not owe federal tax.

State tax rules vary widely, and some states offer their own planning strategies. If you own property in multiple states, the rules become more complex. A tax professional familiar with your state can tell you whether state-level planning is necessary.

Frequently Asked Questions

Do I need to do anything now if my estate is below the current threshold?

Not for federal estate tax purposes, but it depends on your goals and state. If you live in a state with a lower estate tax threshold, you may want to plan ahead. If you expect your estate to grow significantly or if you want to control how your property passes to heirs, a basic will or trust can be useful regardless of tax. A local attorney can advise what makes sense for your situation.

If I give away property now, can I change my mind later?

That depends on how you give it away. Annual gifts under $18,000 per person are final — you cannot take them back. Gifts to irrevocable trusts are also permanent. Gifts to revocable trusts or transfers with retained interests (like a QPRT) may allow more flexibility, but the rules are complex. Consult an attorney before making large gifts if you think you might need the property later.

What if I own property in another state?

Real estate is taxed by the state where it is located. If you own a vacation home in Florida but live in New York, the Florida property is subject to Florida law, and your overall estate may be subject to New York state estate tax. This can complicate planning. An estate attorney in your home state can advise how multi-state property affects your situation.

Does a revocable living trust avoid federal estate tax?

No. A revocable living trust avoids probate and keeps your affairs private, but the full value of property in the trust is still included in your taxable estate. It does not reduce estate tax. Irrevocable trusts can reduce estate tax, but you give up control of the property.

What if Congress changes the law before 2026?

Congress could raise the threshold, lower it, eliminate the tax, or leave it as scheduled. No one knows what will happen. Some people plan for the worst case (threshold drops to $7 million) and adjust if the law changes. Others wait to see what Congress does. Both approaches have trade-offs. A tax professional can help you weigh the options.