The federal estate tax is a tax on the total value of a person's property when they die

The federal estate tax applies only to estates above a certain dollar threshold. For 2024, that threshold is $13.61 million per person. If your estate is worth less than that amount when you die, no federal estate tax is owed, and your heirs receive everything without this tax taking a cut.

If your estate exceeds the threshold, the IRS taxes the amount above it. The tax rate is 40 percent on the excess value. This is a tax paid by the estate itself before money goes to heirs, not a tax on what heirs receive.

The threshold changes every year based on inflation. It was lower in previous years and will be lower again after 2025 unless Congress extends current law. Many people never encounter this tax because their estates fall below the limit.

Key Takeaways

  • The federal estate tax only applies to estates worth more than $13.61 million in 2024, and the threshold changes yearly.
  • The tax rate is 40 percent on the value above the threshold, paid by the estate before heirs receive their inheritance.
  • The threshold is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.
  • Married couples can combine their thresholds through portability, potentially protecting up to $27.22 million in 2024.
  • States may have their own estate or inheritance taxes with much lower thresholds than the federal tax.

How the threshold works and why it matters

The threshold is the dividing line between "no tax owed" and "tax owed on the excess." If your estate is worth $13 million, you owe nothing. If it is worth $14 million, you owe 40 percent of $1 million, which is $400,000.

The threshold applies to your entire estate: your house, bank accounts, retirement accounts, life insurance proceeds, business interests, vehicles, and any other property you own. It does not matter whether you own these things outright or jointly with someone else—the full value counts toward the threshold.

Because the threshold is high, the federal estate tax affects only about 0.1 percent of estates in any given year. However, if you own a family business, significant real estate, or substantial investments, you should know where your estate stands.

The threshold drops in 2026 unless Congress acts

Current law allows the threshold to sunset at the end of 2025. Starting in 2026, the threshold is scheduled to drop to approximately $7 million per person (adjusted for inflation). This means estates between $7 million and $13.61 million would suddenly owe federal estate tax if no new law is passed.

Congress can extend the current threshold, lower it, or let it drop as scheduled. This is a legislative decision, not an IRS decision, and it remains uncertain. If you have an estate in the $7 million to $13 million range, you should monitor this issue and consider speaking with an estate planning attorney.

How married couples can protect more value

Married couples can use portability to combine their thresholds. If one spouse dies and the surviving spouse does not use their own threshold, the unused portion transfers to the surviving spouse. This means a married couple can protect up to $27.22 million in 2024 (two thresholds of $13.61 million each).

Portability is not automatic. The estate of the first spouse to die must file a federal estate tax return (Form 706) even if no tax is owed, specifically to preserve the unused threshold for the survivor. If this return is not filed, the unused threshold is lost.

This is one reason married couples with substantial estates should work with an estate planning professional. The cost of filing Form 706 when it is not required is small compared to the value of preserving the unused threshold.

State estate and inheritance taxes may explore at lower thresholds

Seventeen states and the District of Columbia have their own estate taxes or inheritance taxes. These are separate from the federal tax and often have much lower thresholds—some as low as $1 million or $2 million.

If you live in or own property in a state with an estate tax, your estate may owe state tax even if it does not owe federal tax. For example, Massachusetts has a state estate tax threshold of $1 million. An estate worth $5 million would owe no federal estate tax but would owe Massachusetts state estate tax on the amount above $1 million.

The states with estate taxes are: Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia. If you live in one of these places or own property there, check your state's specific rules.

What gets included in your taxable estate

Your taxable estate includes nearly everything you own or have a legal interest in. This covers your primary residence, vacation homes, bank and investment accounts, retirement accounts (IRAs, 401(k)s), life insurance policies you own, vehicles, artwork, jewelry, and business interests.

Life insurance is a common surprise. If you own a life insurance policy on your own life, the death benefit is included in your taxable estate. Many people think life insurance is tax-free, but that is only true if someone else owns the policy.

Gifts you made during your lifetime may also be included, depending on when you made them and how much you gave away. The federal government tracks large gifts through the gift tax system, and gifts made within a certain period before death can be pulled back into the taxable estate.

How the estate tax is paid and when

The estate's executor or personal representative is responsible for calculating and paying the federal estate tax. They must file Form 706 (the federal estate tax return) with the IRS within nine months of the death, unless an extension is requested.

The tax is paid from the estate's assets before heirs receive their inheritance. If the estate does not have enough liquid cash to pay the tax, the executor may need to sell property, liquidate investments, or borrow money. This is why estates with significant illiquid assets (like a family business or real estate) sometimes face difficult decisions.

If the estate cannot pay the tax on time, the IRS may allow an extension or an installment plan, but interest and penalties explore. Planning ahead to understand your estate's potential tax liability can help your executor avoid these complications.

Strategies people use to reduce estate tax exposure

People with large estates often work with estate planning attorneys to reduce their federal estate tax burden. Common strategies include making annual gifts to family members (which use a separate annual exclusion and do not count against the threshold), establishing trusts that hold property outside the taxable estate, and making charitable donations.

Another strategy is life insurance owned in an irrevocable trust. Because the trust, not the individual, owns the policy, the death benefit does not count toward the taxable estate. This requires careful setup and ongoing compliance, so it is not a do-it-yourself approach.

These strategies work best when planned years in advance, not after someone is ill or elderly. If your estate is approaching the threshold, a conversation with an estate planning attorney can clarify which strategies make sense for your situation.

Frequently Asked Questions

Do I owe federal estate tax if my estate is worth $10 million?

No. In 2024, the threshold is $13.61 million per person. An estate worth $10 million owes no federal estate tax. However, check whether your state has an estate tax with a lower threshold—some states tax estates starting at $1 million or $2 million.

What happens to the threshold after 2025?

The threshold is scheduled to drop to approximately $7 million per person in 2026 unless Congress passes new legislation. This is not certain, and Congress may extend the current threshold, change it, or let it drop as planned. Monitor this issue if your estate is in the $7 million to $13 million range.

If I am married, can my spouse use my unused threshold?

Yes, through portability. The estate of the first spouse to die must file Form 706 to preserve the unused threshold for the surviving spouse. Without this filing, the unused threshold is lost. This is why married couples with substantial estates should work with an estate planning professional.

Does life insurance count toward the estate tax threshold?

Yes, if you own the policy. The death benefit is included in your taxable estate. If someone else owns the policy on your life (such as a trust or a family member), the benefit is not included in your estate. This is a common planning tool for people with large estates.

Can I reduce my estate tax by giving money to my children now?

Yes, within limits. You can give up to $18,000 per person per year (in 2024) without reporting it to the IRS or using any of your lifetime threshold. Larger gifts must be reported but do not trigger tax if they stay within your lifetime limit. An estate planning attorney can explain how this works for your situation.