The estate tax is a federal tax on the total value of a person's property when they die, but it only applies if the estate exceeds a threshold set by Congress.

The estate tax — often called the "death tax" — is a one-time tax the federal government collects on estates worth more than a certain amount. For 2024, that threshold is $13.61 million per person. If your estate is smaller than that, no federal estate tax is owed, regardless of who inherits it.

The tax rate on estates that do exceed the threshold is 40 percent of the amount over the limit. So if an estate is worth $14 million, only the $390,000 above $13.61 million is taxed at 40 percent, which equals $156,000 in federal estate tax. The threshold changes every year based on inflation, and it is set to drop significantly in 2026 unless Congress acts.

Most people do not pay this tax. The vast majority of estates fall below the threshold and pass to heirs tax-free. State-level estate taxes exist in some states and have lower thresholds, which means more estates may owe state tax even if federal tax does not apply.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, and the rate is 40 percent on the amount above that threshold.
  • The threshold is adjusted annually for inflation and is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.
  • Fewer than one in 1,000 estates owe federal estate tax because most people's total assets fall below the threshold.
  • Some states impose their own estate tax with lower thresholds, so you may owe state tax even if federal tax does not apply.
  • The tax is paid by the estate itself before money is distributed to heirs, not by the heirs individually.

How the federal threshold works and why it matters

The exemption threshold is the dollar amount below which no federal estate tax is owed. In 2024, each person can leave $13.61 million to heirs without triggering federal estate tax. A married couple can leave $27.22 million combined because each spouse has their own exemption.

This threshold is not permanent. 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 will drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it. This means estates between $7 million and $13.61 million that are safe from federal tax today could owe tax after 2025.

The threshold changes every year because it is indexed to inflation. The IRS announces the new amount each October for the following year. If you have a large estate, tracking this number matters because your tax liability could change based on the threshold alone, without any change to your actual assets.

What gets included in the taxable estate

The estate tax applies to nearly everything a person owns at death: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and business interests. The IRS values these assets at their fair market value on the date of death (or an alternate valuation date six months later, if the estate chooses).

Some assets are excluded or reduced. Money left to a surviving spouse is not taxed under the marital deduction, meaning spouses can leave unlimited amounts to each other without owing estate tax. Gifts to charities are also excluded. Debts owed by the deceased — mortgages, loans, medical bills — reduce the taxable estate.

Life insurance is often overlooked. If you own a life insurance policy on your own life, the death benefit counts as part of your taxable estate, even though it goes directly to the beneficiary. This can push an otherwise modest estate over the threshold. Some people place life insurance in an irrevocable trust to keep it out of the taxable estate.

State estate taxes and inheritance taxes

Twelve states and Washington, D.C. impose their own estate tax. The thresholds are much lower than the federal level. Massachusetts, for example, taxes estates over $1 million. Oregon taxes estates over $1 million. Connecticut taxes estates over $12.92 million in 2024. If you live in or own property in one of these states, you may owe state estate tax even if your estate is below the federal threshold.

Six states also impose an inheritance tax, which is different from an estate tax. An inheritance tax is paid by the person who receives the money, not by the estate. The tax rate and threshold depend on the heir's relationship to the deceased — spouses and children often pay nothing or a lower rate, while distant relatives or unrelated people pay more. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes.

If you have significant assets or own property in multiple states, you should research both the federal threshold and your state's rules. A tax professional can help you understand your specific situation.

Who pays the estate tax and when

The executor or personal representative of the estate is responsible for calculating and paying the estate tax. This is the person named in the will or appointed by the court to manage the estate. The tax is paid from estate assets before money is distributed to heirs, which means heirs may receive less than they would have if no tax were owed.

The executor must file Form 706 (the federal estate tax return) with the IRS within nine months of the person's death. If the estate does not owe tax because it is below the threshold, no return is required in most cases. However, if the estate is close to the threshold or if there are complex assets, filing a return may still be wise to document the exemption and protect against future IRS questions.

The nine-month deadline is firm. If the return is late, the IRS charges interest and penalties. An extension can be requested, but it does not extend the time to pay the tax itself — only the time to file the return.

Planning strategies to reduce or avoid estate tax

People with large estates often use legal strategies to reduce the amount subject to tax. The most common is the annual gift tax exclusion, which allows you to give up to $18,000 per person per year (in 2024) without using any of your lifetime exemption. A married couple can give $36,000 per year to each child, grandchild, or other person without tax consequences.

Another strategy is a revocable living trust, which lets you control your assets during life and pass them to heirs outside of probate after death. This does not reduce estate tax, but it simplifies the process and keeps the estate private. An irrevocable life insurance trust can remove life insurance proceeds from the taxable estate if set up correctly.

Charitable giving is also powerful. Money left to may have access to charities is not subject to estate tax, and you can use a charitable remainder trust to receive income during life while leaving the remainder to charity. These strategies require professional help to set up correctly, and the rules are complex. If you have an estate over $5 million, consulting a tax attorney or estate planner is worth the cost.

The scheduled threshold drop in 2026

The current high exemption threshold ($13.61 million per person) expires at the end of 2025. Starting in 2026, the threshold will drop to approximately $7 million per person, adjusted for inflation. This is sometimes called the "sunset" of the Tax Cuts and Jobs Act.

Congress could change this before it happens, but as of now, the law is set to change. If you have an estate between $7 million and $13.61 million, this matters. Some people are accelerating gifts or other tax planning strategies before 2026 to take advantage of the higher threshold while it lasts.

This is not a deadline in the sense that you must act immediately, but it is a known date when the rules change. If you have substantial assets, it is worth reviewing your plan with a professional before the end of 2025 to understand how the change affects you.

Frequently Asked Questions

Do I have to pay estate tax if I inherit money from a relative?

No. The estate itself pays the tax before distributing money to heirs. Heirs do not owe federal income tax on inherited money. However, if you inherit an asset that produces income after the death (like rental property or a business), you may owe income tax on that future income. Some states have inheritance taxes that heirs must pay, depending on the state and your relationship to the deceased.

What happens if the estate does not have enough cash to pay the tax?

The executor can sell assets from the estate to raise the money needed to pay the tax. If the estate is mostly illiquid (like a family business or real estate), this can force a sale. Some estates use life insurance proceeds to cover the tax bill. Planning ahead can prevent this problem.

Does a life insurance payout count toward the estate tax threshold?

Yes, if you own the policy. Life insurance proceeds are included in your taxable estate at full value. If you own a $2 million policy and your other assets total $12 million, your taxable estate is $14 million, which exceeds the 2024 threshold. Placing the policy in an irrevocable trust can remove it from the taxable estate, but this must be done correctly and well before death.

Can I leave my entire estate to my spouse and avoid estate tax?

Yes, through the marital deduction. You can leave unlimited amounts to a surviving spouse without owing federal estate tax. However, the assets will be part of your spouse's estate when they die, so the tax may apply then. Some couples use a strategy called an "AB trust" or "bypass trust" to use both spouses' exemptions and reduce tax on the second death.

What if I live in a state with an estate tax but my assets are below the state threshold?

You would not owe state estate tax. Each state sets its own threshold. If your estate is below your state's threshold, no state tax is owed, even if you live there. However, if you own property in multiple states, you may owe tax in more than one state. This is another reason to review your situation with a professional if you have significant assets.