Estate tax is a federal tax on the total value of a person's property when they die
The federal estate tax applies only to estates worth more than $13.61 million as of 2024. That threshold changes each year — it was $12.92 million in 2023 and will shift again in 2025. If your estate falls below the threshold, no federal estate tax is owed, regardless of what you leave behind.
When an estate does cross the threshold, the tax rate is 40 percent on the amount above the limit. So if an estate is worth $14 million, only $390,000 is subject to tax (the $1 million over the threshold, times 40 percent). The executor or estate administrator pays this tax from the estate's assets before distributing money to heirs.
The threshold is temporary. It is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress changes the law. Many states also have their own estate taxes with much lower thresholds — some as low as $1 million — so you 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 that threshold drops to about $7 million in 2026 unless Congress acts.
- The tax rate is 40 percent on the amount above the threshold, paid from the estate before heirs receive their inheritance.
- Many states impose their own estate taxes with lower thresholds, so you may owe state tax even if the federal threshold does not apply.
- Married couples can combine their thresholds through portability, effectively doubling the amount that passes tax-free.
- The threshold changes every year based on inflation, so an estate that is not taxable today might be taxable in a future year.
How the threshold works for married couples
When a married person dies, their unused threshold can transfer to the surviving spouse through a process called portability. This means a married couple can effectively pass $27.22 million tax-free in 2024 (both thresholds combined), rather than each person's $13.61 million separately.
Portability does not happen automatically. The executor must file a federal estate tax return — even if no tax is owed — within nine months of death to preserve the unused threshold. If that return is not filed, the surviving spouse loses the ability to use the deceased spouse's unused amount.
This matters most when one spouse dies with a small or moderate estate and the other spouse later inherits a large amount from a third party or accumulates significant wealth. Without portability, the second death could trigger a large tax bill.
State estate taxes and inheritance taxes
Seventeen states and the District of Columbia impose their own estate taxes, separate from federal tax. State thresholds vary widely: Washington state starts at $2.193 million in 2024, while Massachusetts and Maine begin at $1 million. Oregon and Illinois set theirs at $4 million and $4 million respectively. These thresholds also change yearly.
Some states use inheritance tax instead of estate tax. The difference matters to heirs: an inheritance tax is paid by the person who receives the money, while an estate tax is paid by the estate itself. Only six states have inheritance taxes (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania), and the rates and thresholds differ for each.
A few states have both an estate tax and an inheritance tax. New Jersey, for example, taxes the estate and also taxes certain heirs. If you live in or own property in multiple states, you may owe tax in more than one place.
What counts toward the estate value
The estate includes not just a house and bank accounts, but also life insurance proceeds, retirement accounts, investment accounts, vehicles, and business interests. The value used for tax purposes is the fair market value at the date of death — what the property would sell for on that day, not what was paid for it years earlier.
Some assets pass outside the estate and do not count toward the threshold. These include property held in a living trust, accounts with named beneficiaries (like IRAs or life insurance with a named beneficiary), and property owned as joint tenants with rights of survivorship. Money left to a surviving spouse or to a charity also does not count.
Debts owed by the deceased — mortgages, credit card balances, medical bills — reduce the taxable estate. The executor pays these debts from estate assets before calculating what is subject to tax.
How the threshold changes year to year
The federal threshold is adjusted annually for inflation. The IRS announces the new amount in October or November for the following year. In recent years the threshold has risen: it was $12.06 million in 2022, $12.92 million in 2023, and $13.61 million in 2024.
This annual adjustment means an estate that is not taxable in one year could become taxable in the next if the threshold drops. The opposite is also true: if inflation continues and Congress does not change the law, the threshold will rise further before the 2026 sunset.
State thresholds also adjust annually, though on different schedules and by different amounts. Check your state's tax department website for the current year's threshold if you live in a state with an estate tax.
Planning strategies that reduce or avoid estate tax
People with estates near or above the threshold often use legal tools to reduce the taxable amount. A revocable living trust keeps property out of probate but does not reduce the taxable estate. An irrevocable life insurance trust (ILIT) can remove life insurance proceeds from the estate, lowering the total value subject to tax.
Annual gifts to family members or others can also reduce an estate over time. In 2024, you can give up to $18,000 per person per year without using any of your lifetime threshold. Gifts above that amount reduce your available threshold dollar-for-dollar.
Charitable donations — either during life or through a will — remove money from the taxable estate entirely. Some people use a charitable remainder trust to receive income during their lifetime while the remainder goes to charity, achieving both tax savings and charitable giving.
These strategies require planning with an attorney or tax professional who understands your state's rules and your specific situation. The cost of that advice is usually far less than the tax saved.
What happens if an estate owes tax
The executor is responsible for calculating and paying estate tax. They file Form 706 (the federal estate tax return) with the IRS within nine months of death. If the estate does not have enough liquid cash to pay the tax, the executor may need to sell assets — sometimes including the family home or business — to raise the money.
Some estates are allowed to pay the tax in installments over time, particularly if the estate includes a family business or farm. The IRS charges interest on the unpaid balance, so installment payments cost more than paying in full upfront.
If the executor does not file the return or pay the tax on time, the IRS charges penalties and interest. These costs compound quickly, so prompt action matters.
Frequently Asked Questions
Will I owe estate tax when my parent dies?
Only if the total value of their estate exceeds $13.61 million in 2024 (or your state's threshold if it is lower). Most estates do not reach that amount. The executor will know whether tax is owed after adding up all assets and subtracting debts and charitable gifts.
Does life insurance count toward the estate tax threshold?
Yes, unless the policy is owned by an irrevocable life insurance trust or someone other than the deceased. If the deceased owned the policy, its full value at death counts toward the taxable estate, even though the beneficiary receives the money outside probate.
What if I give money to my children now instead of leaving it in my will?
Gifts up to $18,000 per person per year (in 2024) do not count against your lifetime threshold. Larger gifts reduce your available threshold dollar-for-dollar. Once your lifetime threshold is used up, any additional gifts or estate value is taxed at 40 percent.
Can I avoid estate tax by moving to a state with no estate tax?
Moving does not erase tax owed on property you already own in another state. If you own real estate in a state with an estate tax, that state can tax the property even if you move away. You would owe tax in both states on the same asset.
What is the difference between estate tax and income tax on inherited money?
Estate tax is paid by the estate before heirs receive their inheritance. Heirs generally do not owe income tax on inherited money, though they may owe income tax on future earnings from that money (like interest or dividends). These are separate taxes with different rules.