The estate tax is a federal tax on the money and property someone leaves behind when they die
The estate tax — sometimes called the "death tax" — applies to the total value of everything a person owned at the time of their death. This includes real estate, bank accounts, investments, vehicles, and personal property. The federal government taxes estates that exceed a certain threshold, called the exemption amount. That threshold changes every year and is set by Congress.
The estate tax is separate from income tax or property tax. It only comes into play after someone has died, and only if their estate is large enough to owe it. Most estates in the United States do not owe federal estate tax because the exemption amount is high. However, some states have their own estate taxes with lower thresholds, so an estate might owe state tax even if it does not owe federal tax.
Key Takeaways
- The federal estate tax applies only to estates worth more than the exemption amount, which changes yearly and is currently in the millions of dollars.
- The tax is paid from the estate's assets before money and property are distributed to heirs, not by the heirs themselves.
- Some states impose their own estate taxes with lower thresholds than the federal exemption, so you may owe state tax even if you owe no federal tax.
- The exemption amount is temporary under current law and is scheduled to drop significantly after 2025 unless Congress changes the law.
Who pays the estate tax and when
The estate itself pays the federal estate tax, not the individual heirs. The person managing the estate — called the executor or personal representative — is responsible for filing the estate tax return with the IRS if the estate is large enough. This happens after the person has died and before the remaining money and property are handed out to family members or other beneficiaries.
The tax is due nine months after the date of death, though an extension can be requested. The executor pays the tax from the estate's assets, which means there is less money left to distribute to heirs. This is why the estate tax can significantly reduce what beneficiaries receive, especially in large estates.
The exemption amount and how it works
The federal exemption amount is the threshold below which no federal estate tax is owed. For 2024, the exemption is $13.61 million per person. This means an estate worth $13.61 million or less owes no federal estate tax. A married couple can combine their exemptions, potentially sheltering up to $27.22 million from federal estate tax.
The exemption amount is not permanent. It was increased significantly by the Tax Cuts and Jobs Act of 2017, but that increase is scheduled to expire after December 31, 2025. After that date, the exemption is set to drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation. This means estates that do not owe tax today might owe tax in 2026 if the exemption drops as currently scheduled.
State estate taxes and inheritance taxes
Twelve states plus Washington, D.C., have their own estate taxes. These state-level taxes apply to estates below the federal exemption threshold. For example, some states tax estates worth more than $1 million or $2 million, which means an estate could owe state tax even though it does not owe federal tax.
Six states also have inheritance taxes, which work differently. An inheritance tax is paid by the person who receives the money or property, not by the estate itself. The tax rate and what is taxed varies by state and by the relationship between the deceased and the heir. Some states exempt close relatives like spouses and children from inheritance tax.
What assets are included in the taxable estate
The taxable estate includes nearly everything a person owned: real estate, bank accounts, stocks and bonds, retirement accounts, life insurance proceeds, vehicles, jewelry, art, and business interests. It also includes certain gifts made during the person's lifetime if those gifts exceeded the annual gift tax exclusion amount.
Some assets are not included in the taxable estate. Money left to a surviving spouse is usually exempt from federal estate tax if the spouse is a U.S. citizen. Charitable donations are also exempt. Life insurance proceeds may be excluded if the policy is owned by someone other than the deceased person, such as a trust or a beneficiary.
The tax rate and how much is owed
The federal estate tax rate is a flat 40 percent on the amount of the estate that exceeds the exemption threshold. This is a high rate, but it only applies to the portion above the exemption. For example, if an estate is worth $15 million and the exemption is $13.61 million, only the $1.39 million above the exemption is taxed at 40 percent, resulting in a tax of about $556,000.
State estate taxes vary. Some states use a graduated rate structure where the rate increases as the estate value increases. Others use a flat rate. State rates are generally lower than the federal rate but can still significantly reduce what heirs receive.
Planning strategies to reduce estate tax
People with large estates often work with attorneys and tax professionals to reduce the amount of estate tax owed. Common strategies include setting up trusts, making annual gifts to family members (which are not taxed if they stay below the annual exclusion amount), establishing charitable trusts, and using life insurance in specific ways.
A revocable living trust, for example, allows a person to transfer assets during their lifetime in a way that can reduce the taxable estate. An irrevocable life insurance trust can remove life insurance proceeds from the taxable estate. These strategies require planning before death and should be discussed with an attorney who specializes in estate planning.
Frequently Asked Questions
Does everyone have to pay estate tax?
No. Most estates do not owe federal estate tax because the exemption amount is high. Only estates worth more than $13.61 million (in 2024) owe federal tax. However, some states have lower thresholds, so an estate might owe state tax even if it does not owe federal tax.
What happens if the exemption drops after 2025?
The exemption is scheduled to drop to approximately $7 million per person after December 31, 2025, unless Congress changes the law. This means more estates will owe federal tax starting in 2026. People with estates near or above that threshold should consider planning strategies before the exemption drops.
Can heirs be forced to pay the estate tax?
No. The estate pays the tax from its assets before heirs receive their inheritance. However, if the estate does not have enough liquid assets to pay the tax, the executor may need to sell property or investments to raise the money, which can reduce what heirs receive.
Is life insurance included in the taxable estate?
Life insurance proceeds are included in the taxable estate if the deceased person owned the policy. However, if someone else owns the policy — such as a trust or an adult child — the proceeds are usually not included. This is why some people transfer life insurance policies to trusts as part of estate planning.