The estate tax is a federal tax on the total value of everything a person owns when they die
The estate tax applies only to estates above a certain dollar threshold. That threshold changes each year and is much higher than most people's total assets. In 2024, for example, the federal estate tax applies only to estates worth more than $13.61 million. Most people never pay it because their estates fall below that line.
The tax is paid from the estate itself before money and property go to heirs. It is not a tax on what the heirs receive — that is a separate question. The estate's executor (the person managing the estate) calculates what is owed, pays it from estate funds, and then distributes what remains to beneficiaries named in the will or by state law.
Some states also have their own estate taxes with lower thresholds. A few states tax inheritances instead, which works differently. Your state's rules matter if you live or own property outside your home state.
Key Takeaways
- The federal estate tax only applies to estates worth more than $13.61 million in 2024, a threshold that rises each year with inflation.
- The tax is paid from the estate before heirs receive their inheritance, not by the heirs themselves on what they inherit.
- Some states impose their own estate taxes at much lower thresholds, so you may owe state tax even if you owe no federal tax.
- The executor of the estate files Form 706 with the IRS if the estate exceeds the threshold, and the important date is nine months after death.
- Married couples can combine their thresholds through portability, potentially doubling the amount that passes tax-free to heirs.
Who pays the estate tax and when
The executor pays the estate tax, not the heirs. The executor is the person named in the will to manage the estate, or appointed by a court if there is no will. The executor gathers all the assets, values them as of the date of death, subtracts debts and expenses, and determines whether the remaining estate exceeds the threshold.
The payment is due nine months after the person's death. The executor files Form 706 (the estate tax return) with the IRS and includes the payment with that form. If the estate is below the threshold, no Form 706 is required and no federal estate tax is owed, though the executor may still need to file other documents to transfer property to heirs.
If the estate does not have enough liquid money to pay the tax, the executor may need to sell assets — sometimes property or investments — to raise the funds. This is one reason people with large estates sometimes plan ahead to avoid forcing a fire sale.
What counts as part of your estate
Your estate includes everything you own at death: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, vehicles, and personal property like jewelry or art. It also includes property you own jointly with someone else (though the value may be reduced depending on how the ownership is structured) and assets you transferred to a trust.
Some things do not count toward the estate tax threshold. Money or property left directly to a surviving spouse usually does not count, because of the unlimited marital deduction. Gifts to charities do not count. Money left to pay estate debts and funeral expenses reduces the taxable amount.
Life insurance is often a surprise: if you own the policy, the death benefit counts as part of your estate, even though it goes directly to the beneficiary you named. If someone else owns the policy on your life (like a trust or your spouse), it may not count.
The difference between federal and state estate taxes
Twelve states plus Washington, D.C., have their own estate taxes. The thresholds are much lower than the federal threshold. New York's threshold, for example, is $6.94 million in 2024. Massachusetts has no threshold at all — any estate with any value owes state tax. Connecticut's threshold is $12.92 million.
A few states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — tax inheritances instead of estates. An inheritance tax is paid by the person who receives the money or property, not by the estate. The rate depends on who inherits: spouses and children usually pay nothing or a low rate, while more distant relatives or unrelated people pay higher rates.
You may owe both federal and state tax, or state tax alone if your estate is below the federal threshold but above your state's. Some states allow a credit for federal estate tax paid, which reduces the state tax owed. Check your state's rules if you live in a state with an estate or inheritance tax.
How the tax rate works
The federal estate tax rate is a flat 40 percent on the amount above the threshold. If your estate is worth $14.61 million and the threshold is $13.61 million, the taxable amount is $1 million, and the tax owed is $400,000.
State estate taxes vary. Some states use a graduated rate that increases with the size of the estate. Others use a flat rate. New York's rate ranges from 3.06 percent to 16 percent depending on how much above the threshold the estate is. You need to check your specific state's rules to know what rate applies.
The threshold itself changes each year. The IRS adjusts it for inflation. It was $12.92 million in 2023 and $13.61 million in 2024. Congress set the current threshold to expire at the end of 2025, after which it would drop to around $7 million (adjusted for inflation) unless Congress acts. This potential change matters if you are planning an estate.
Portability and married couples
Married couples can use portability to combine their thresholds. If one spouse dies and does not use their full threshold, the surviving spouse can use the unused amount. This effectively doubles the threshold for the surviving spouse's estate.
To use portability, the executor of the first spouse's estate must file Form 706 even if the estate is below the threshold. The form documents how much of the threshold was used, so the surviving spouse's executor can claim the unused portion later. Without filing Form 706, the unused threshold is lost.
Portability is automatic for spouses but not for unmarried partners or adult children. If you are not married but want to pass a large estate to a partner or child, you need different planning strategies, such as trusts or lifetime gifts.
Planning strategies to reduce or avoid estate tax
People with large estates often use legal strategies to reduce the tax owed. One common approach is to give money or property to heirs during your lifetime. You can give up to a certain amount per year per person without triggering gift tax. In 2024, that amount is $18,000 per person per year. Gifts to spouses and charities have no limit.
Another strategy is to place assets in a trust. Depending on how the trust is structured, assets inside it may not count toward your taxable estate. Irrevocable life insurance trusts (ILITs) are often used to keep life insurance proceeds out of the estate. Charitable remainder trusts allow you to give to charity while receiving income during your lifetime.
These strategies require planning before death and often involve working with an estate attorney or tax professional. They are most useful for people whose estates are close to or above the threshold. If your estate is well below the threshold, these strategies may not be necessary.
Frequently Asked Questions
Do I have to pay estate tax if I inherit money from a relative?
No. The estate pays the tax, not the heirs. You receive your inheritance without owing federal estate tax on it. However, if you live in a state with an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania), you may owe tax on what you inherit, depending on your relationship to the person who died and your state's rates.
What happens if the estate does not have enough money to pay the tax?
The executor may need to sell assets to raise the funds. If the estate includes real estate or investments, these might be sold to cover the tax bill. This is one reason people with large estates sometimes buy life insurance or set up trusts — to have liquid money available to pay the tax without forcing a sale of property the heirs wanted to keep.
Can I reduce my estate tax by giving money away before I die?
Yes. You can give up to $18,000 per person per year in 2024 without using any of your lifetime threshold. Gifts to your spouse and to charities have no limit. These gifts reduce the size of your taxable estate. A tax professional can help you plan a gifting strategy if your estate is large.
Does the estate tax threshold change every year?
Yes, the IRS adjusts the threshold each year for inflation. It was $13.61 million in 2024. The threshold is set to drop significantly at the end of 2025 unless Congress extends the current law. If you have a large estate, it is worth monitoring these changes and reviewing your plan.
What if I own property in multiple states?
Real estate is taxed by the state where it is located. If you own a vacation home in another state, that state may tax it as part of your estate if you die. You may owe both federal estate tax and estate or inheritance tax in multiple states. An estate attorney familiar with multi-state property can help you understand your exposure.