Estate tax is a federal tax on the total value of everything a person owns when they die
When you die, the IRS may tax your estate — the money, property, investments, and other assets you leave behind. Estate tax applies only to estates above a certain value, which changes each year. For 2024, federal estate tax applies only to estates worth more than $13.61 million. That threshold is much higher than most people's estates, which is why most Americans do not owe federal estate tax at all.
The executor of your estate (the person named in your will to handle your affairs) is responsible for calculating whether estate tax is owed and paying it before distributing money to your heirs. If your estate is large enough to owe tax, the executor files Form 706 with the IRS. The tax rate on taxable estates ranges from 18% to 40%, depending on how much the estate exceeds the threshold.
Some states also charge their own estate tax or inheritance tax, which is separate from federal tax. State thresholds are often much lower than the federal threshold — some states tax estates worth $1 million or more. Whether you owe state tax depends on where you lived when you died and where your property is located.
Key Takeaways
- Federal estate tax in 2024 applies only to estates worth more than $13.61 million, so most people's estates will not owe this tax.
- The tax rate on taxable estates ranges from 18% to 40% of the amount above the threshold.
- Your estate's executor files Form 706 with the IRS if the estate is large enough to owe federal tax.
- Some states charge their own estate tax or inheritance tax with lower thresholds, so you may owe state tax even if you do not owe federal tax.
- The federal threshold changes each year, and it is scheduled to drop significantly in 2026 unless Congress changes the law.
How the federal estate tax threshold works
The amount of your estate that is not taxed — called the exemption — is set by federal law and changes annually. In 2024, each person can leave $13.61 million tax-free. Anything above that amount is subject to estate tax.
If you are married, both you and your spouse each have your own exemption. A married couple can together leave $27.22 million tax-free in 2024. However, this requires proper planning: your will or trust must be written to take advantage of both exemptions, or your spouse's unused exemption may be lost.
The exemption is temporary. It is scheduled to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress passes new legislation. This means estates that would not owe tax in 2024 might owe tax in 2026 if the law does not change. Many people with estates between $7 million and $13.61 million are reviewing their plans now because of this scheduled change.
What counts as part of your taxable estate
Your taxable estate includes more than just cash and real estate. It includes retirement accounts (401(k)s, IRAs), life insurance death benefits, investment accounts, vehicles, art, jewelry, and any other property you own. It also includes the value of any business you own, even if it is only a partial stake.
Some assets pass outside your estate and are not subject to estate tax. Money in a payable-on-death bank account goes directly to the named beneficiary. Life insurance proceeds go to the named beneficiary. Retirement accounts with a named beneficiary pass directly to that person. Property held in a living trust is not part of your probate estate, though it may still count toward your taxable estate for federal tax purposes.
Gifts you made during your lifetime can also affect your taxable estate. If you gave away more than $18,000 to any one person in 2024 (the annual gift tax exclusion), you must report those gifts. Large gifts reduce your exemption dollar-for-dollar, meaning less you can leave tax-free when you die.
How estate tax is calculated and paid
The executor calculates estate tax by adding up the value of all assets in the estate, subtracting any debts and expenses, and then subtracting the exemption amount. Whatever remains is the taxable estate. The tax is then calculated at rates ranging from 18% to 40%.
Here is a simplified example: if your estate is worth $15 million in 2024, you subtract the $13.61 million exemption, leaving $1.39 million taxable. The tax on that amount would be roughly $540,000 (the exact rate depends on how the tax brackets explore). Your executor must pay this tax from estate assets before distributing money to heirs.
The executor has nine months from the date of death to file Form 706 and pay any tax owed. If the estate cannot pay the tax in cash, the executor may be able to request an extension or arrange to pay in installments, though interest accrues during the extension period.
State estate tax and inheritance tax
Twelve states and the District of Columbia charge their own estate tax. These states are Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Each state sets its own threshold and tax rate.
Six states charge inheritance tax instead of estate tax. Inheritance tax is paid by the person who receives the money, not by the estate itself. These states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state that charges both.
State thresholds are much lower than the federal threshold. New York's estate tax, for example, applies to estates worth $6.94 million or more in 2024. Some states have thresholds below $1 million. If you own property in multiple states, you may owe tax in more than one state. The executor should research the rules in any state where you owned real estate or had significant assets.
Planning strategies to reduce estate tax
People with large estates often work with an attorney or tax professional to reduce what their heirs will owe. One common strategy is a revocable living trust, which lets you control your assets during your lifetime but passes them outside probate when you die. This does not reduce estate tax, but it can simplify the process and keep your estate private.
Another strategy is annual gifting. You can give up to $18,000 per person per year (in 2024) without using any of your exemption. Over time, this moves money out of your taxable estate. Married couples can give $36,000 per person per year by combining their exclusions.
An irrevocable life insurance trust (ILIT) removes life insurance proceeds from your taxable estate. Normally, life insurance you own is included in your estate for tax purposes. An ILIT owns the policy instead, so the death benefit passes to your heirs tax-free.
A charitable remainder trust lets you donate assets to charity while receiving income during your lifetime. The assets are removed from your taxable estate, and you may receive a tax deduction. These strategies require professional help to set up correctly and are most useful for estates well above the exemption threshold.
What happens if your estate does not owe tax
If your estate is below the exemption threshold, your executor does not file Form 706 with the IRS. The estate still goes through probate (if there is a will) or passes according to state law (if there is no will), but no federal estate tax is owed.
Your heirs receive a step-up in basis on inherited assets. This means if you bought stock for $10,000 and it was worth $50,000 when you died, your heirs inherit it at the $50,000 value. If they sell it when ready, they owe no capital gains tax. This step-up applies to most inherited assets and can save heirs significant money on taxes.
Even if no estate tax is owed, your executor may still need to file other tax forms, such as a final income tax return for you or a fiduciary tax return for the estate itself. State law may also require filing certain documents with the probate court.
The 2026 exemption change and what to watch
The current high exemption amount ($13.61 million per person in 2024) is set to expire on December 31, 2025. Starting January 1, 2026, the exemption will drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation.
This scheduled change affects people with estates between $7 million and $13.61 million. If you are in this range, your estate might not owe tax in 2024 but could owe significant tax in 2026. Some people are making large gifts now to use their current exemption before it drops. Others are reviewing their wills and trusts to make sure their plans still make sense under the lower threshold.
Congress could extend the current exemption, raise it, lower it, or let it drop as scheduled. Tax law changes are unpredictable, so it is worth checking your plan every few years or after major life changes like marriage, divorce, or a significant increase in wealth.
Frequently Asked Questions
Do I owe estate tax if I leave money to my spouse?
No. Money you leave to a U.S. citizen spouse is not subject to federal estate tax, no matter how much it is. This is called the marital deduction. However, your spouse's own estate will include that money, so it may be taxed when your spouse dies. State estate tax rules vary — some states allow the marital deduction, and some do not.
What if I give away a large amount of money before I die?
Gifts over $18,000 per person per year (in 2024) must be reported on a gift tax return, and they reduce your exemption dollar-for-dollar. If you give $100,000 to your child, you use $82,000 of your exemption, leaving only $13.61 million minus $82,000 available when you die. The gift itself is not taxed, but it counts against your lifetime limit.
Can my heirs owe estate tax if I do not?
No. Estate tax is paid by the estate before money goes to heirs. Your heirs receive what is left after taxes and expenses are paid. However, if your estate does not have enough cash to pay the tax, the executor may need to sell assets, which could reduce what heirs receive.
Does a will help me avoid estate tax?
A will does not reduce estate tax. It only determines who receives your assets. To reduce estate tax, you need a trust, a gifting strategy, or other planning tools. An attorney can help you choose the right approach based on your estate size and goals.
What if I own property in another country?
U.S. citizens are taxed on their worldwide estate, including foreign property. However, you may be able to claim a credit for taxes paid to other countries. The rules are complex, and you should consult a tax professional if you own significant assets abroad.