Estate tax is a federal tax on the total value of money and property someone leaves behind when they die

The federal government taxes estates — the combined value of a person's bank accounts, real estate, investments, and other assets — if that total exceeds a threshold amount. The executor or administrator of the estate pays this tax from the estate's assets before distributing what remains to heirs. The tax applies only to estates above a certain value, which changes every year based on inflation.

Not every estate owes federal estate tax. Most do not, because the threshold is high. However, some states also impose their own estate taxes or inheritance taxes with lower thresholds, so an estate might owe state tax even if it owes nothing to the federal government. The rules differ significantly between federal and state systems.

Key Takeaways

  • Federal estate tax applies only to estates worth more than a set amount, which was $13.61 million per person in 2024 and changes yearly with inflation.
  • The federal tax rate on taxable estates ranges from 18% to 40%, depending on how much the estate exceeds the threshold.
  • Some states tax estates or inheritances at much lower thresholds — as low as $1 million or less — even if the federal government does not.
  • The executor pays estate tax from the estate's assets before heirs receive their inheritance, which can reduce what beneficiaries get.
  • Certain transfers, such as gifts to spouses or charities, may reduce or eliminate the taxable portion of an estate.

How the federal threshold and tax rate work

The federal estate tax applies only to the portion of an estate that exceeds the exemption threshold. In 2024, that threshold is $13.61 million per person. If an estate is worth $10 million, it owes no federal estate tax. If it is worth $15 million, only the $1.39 million above the threshold is subject to tax.

The tax rate on the amount above the threshold ranges from 18% to 40%, depending on how much the estate exceeds the limit. The more an estate exceeds the threshold, the higher the rate climbs. This is a progressive system: the first dollars above the threshold are taxed at 18%, and rates increase as the estate value grows larger.

The exemption threshold changes every year. It is adjusted for inflation and set by federal law. Married couples can combine their exemptions — meaning a married couple can have an estate worth up to $27.22 million in 2024 before owing federal tax — but only if the surviving spouse takes specific steps to preserve the unused exemption of the first spouse to die.

State estate and inheritance taxes operate differently

Twelve states and the District of Columbia impose their own estate taxes. These are separate from the federal tax, and an estate may owe both. State exemption thresholds are much lower than the federal level. Massachusetts and Oregon tax estates over $1 million. Connecticut taxes estates over $12.92 million. Illinois taxes estates over $4 million. The rates and thresholds vary by state.

Six states impose inheritance taxes instead of estate taxes. The difference matters: an inheritance tax is paid by the person who receives the money or property, not by the estate itself. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all have inheritance taxes. Some of these states exempt certain heirs — spouses and children often pay nothing — while others tax all beneficiaries.

If you live in or own property in a state with an estate or inheritance tax, that state's rules explore regardless of the federal threshold. An estate worth $5 million might owe nothing to the federal government but could owe significant tax to a state with a $1 million threshold.

What counts as part of the taxable estate

The taxable estate includes nearly everything of value the person owned at death: real estate, bank accounts, investment accounts, retirement accounts, life insurance proceeds, vehicles, art, and business interests. It also includes certain gifts made during life under specific circumstances — gifts above an annual limit that were not properly reported, for example.

Some assets pass outside the estate and are not subject to estate tax. These include assets with a named beneficiary, such as life insurance policies where the beneficiary is named directly, or retirement accounts with a designated beneficiary. However, if the policy or account names the estate as beneficiary, or if the person owned the policy in their own name without naming a beneficiary, the full value is included in the taxable estate.

Debts owed by the deceased — mortgages, loans, credit card balances — reduce the taxable estate. The executor subtracts these liabilities from the total value of assets to arrive at the net estate value.

Deductions and transfers that reduce estate tax

Not all transfers from an estate are taxed. The marital deduction allows a person to leave an unlimited amount to a surviving spouse without any estate tax, as long as the spouse is a U.S. citizen. This means a married couple can pass their entire combined estate to each other tax-free.

Gifts to may have access to charities are also deductible from the taxable estate. If someone leaves $2 million to a charity and $3 million to heirs, only the $3 million is subject to tax. This deduction applies to donations made during life as well as bequests in a will.

Certain other transfers reduce the taxable estate: gifts made more than three years before death (with limited exceptions), transfers to trusts structured in specific ways, and payments made directly to educational institutions or medical providers on behalf of another person. These rules are complex, and the structure of the transfer matters significantly.

Who pays the estate tax and when

The executor or administrator of the estate is responsible for calculating and paying estate tax. They file Form 706 (the federal estate tax return) with the IRS if the estate exceeds the exemption threshold. The return 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 before distributing money and property to heirs. This means if an estate owes $500,000 in tax, that amount comes out of what beneficiaries receive. If the estate does not have enough liquid assets (cash or easily sold investments) to pay the tax, the executor may need to sell property or other assets to raise the funds.

Some states also require a separate state estate or inheritance tax return. The timing and filing requirements vary by state. An executor in a state with an estate tax must file both the federal return and the state return.

The exemption threshold is temporary at the federal level

The current federal exemption threshold of $13.61 million (in 2024) is set to change. Under current law, the exemption is scheduled to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress changes the law. This means estates that would not owe tax in 2024 or 2025 could owe tax in 2026 if the exemption drops and the law is not modified.

This scheduled change affects planning decisions for people with large estates. Some may choose to make large gifts or set up trusts before 2026 to take advantage of the higher exemption while it lasts. Others may wait to see whether Congress extends the higher threshold. The rules are subject to change, and anyone with an estate near the threshold should review their situation with a tax professional.

Frequently Asked Questions

Does everyone have to pay estate tax?

No. Most estates do not owe federal estate tax because the exemption threshold is high — $13.61 million per person in 2024. Only estates exceeding that amount owe federal tax. However, some states tax estates at much lower thresholds, so an estate might owe state tax even if it owes nothing federally.

What is the difference between estate tax and inheritance tax?

Estate tax is paid by the estate itself before heirs receive their inheritance. Inheritance tax is paid by the person who receives the money or property. Six states use inheritance tax instead of estate tax. Some inheritance tax states exempt certain heirs like spouses and children from paying any tax.

Can I reduce my estate tax by giving money away before I die?

Yes, in some cases. You can give up to a certain amount per year per person without it counting against your lifetime exemption. Gifts above that annual limit do count against your exemption, reducing the amount you can pass tax-free at death. Gifts to spouses, charities, and certain trusts may have different rules.

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

The executor may need to sell assets — real estate, investments, or business interests — to raise the cash to pay the tax bill. This can force the sale of property the heirs wanted to keep. Some estates use life insurance proceeds to cover the tax, which is one reason life insurance planning matters for larger estates.

Will the federal exemption threshold stay at $13.61 million?

No. The current threshold is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress changes the law. This could significantly increase the number of estates that owe federal tax. Anyone with an estate near the current threshold should review their situation with a tax professional.