The person who settles the estate pays the tax, not the heirs

Estate tax is paid by the estate itself before money or property goes to heirs, not by the people who receive it. The executor — the person named in the will to handle the estate — is responsible for calculating what is owed, filing the tax return with the IRS, and paying from estate funds. If the estate does not have enough cash to cover the tax bill, the executor may need to sell assets to raise the money.

Whether any estate tax is owed at all depends on the total value of everything the person left behind. The federal government only taxes estates above a certain threshold. That threshold changes every year and is much higher than most people's estates. For 2024, federal estate tax applies only to estates worth more than $13.61 million. Most estates never reach that amount, so most families pay no federal estate tax at all.

Some states also charge their own estate tax or inheritance tax, and those thresholds are often lower than the federal limit. A few states tax estates starting at $1 million or less. Whether state tax applies depends on where the person lived when they died and, in some cases, where the heirs live.

Key Takeaways

  • The estate pays federal estate tax before heirs receive anything, and the executor handles the payment using estate money.
  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, a threshold that increases most years.
  • Some states impose their own estate or inheritance tax with lower thresholds, ranging from under $1 million to several million dollars depending on the state.
  • If the estate does not have enough cash on hand, the executor may sell property or investments to pay the tax bill.
  • Heirs do not owe personal income tax on money or property they inherit, even if the estate paid estate tax.

How the executor pays the tax from estate funds

The executor's job includes filing Form 706 (the federal estate tax return) with the IRS if the estate is large enough to require it. The important date is nine months after the person's death, though an extension can push it to 15 months. The form lists everything the estate owns — real estate, bank accounts, investments, vehicles, jewelry, art — and calculates the total value.

Once the IRS receives the return and any tax is owed, the executor pays directly from the estate's bank account or by selling assets. The executor cannot distribute money to heirs until the tax bill is settled and the IRS has closed the case. This can take several months to over a year, depending on how complex the estate is and how quickly the IRS processes the return.

If the estate does not have enough liquid cash (money in bank accounts), the executor may need to sell stocks, real estate, or other property to raise the funds. The executor has a legal duty to pay taxes before distributing anything to heirs, so this step comes before anyone receives their inheritance.

State estate and inheritance taxes work differently

Twelve states and the District of Columbia charge their own estate tax, separate from federal tax. These states are Connecticut, Delaware, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. The tax rate and threshold vary by state. Some states tax estates starting at $1 million; others do not tax until $5 million or higher.

Six states — Indiana, Iowa, Kentucky, Maryland, Nebraska, and New Jersey — charge inheritance tax instead of (or in addition to) estate tax. Inheritance tax is paid by the heirs based on how much they receive and their relationship to the person who died. A spouse or child might pay nothing, while a distant relative or unrelated person might owe tax on their share.

The executor or heirs must check the rules in the state where the person lived. Some states also tax nonresidents who owned property there, so an estate may owe tax in more than one state. State tax returns are filed separately from the federal return and have their own important date, usually nine to twelve months after death.

Why most estates do not owe federal tax

The federal estate tax threshold is so high that it affects only about 0.1 percent of estates in any given year. In 2024, an estate must be worth more than $13.61 million to owe any federal tax at all. This threshold is adjusted for inflation each year and has been rising. It was $12.92 million in 2023 and $12.06 million in 2022.

The threshold is also scheduled to drop significantly after 2025. Unless Congress changes the law, it will fall to approximately $7 million per person in 2026. This means more estates could owe tax in future years, but for now, the vast majority of families will never encounter a federal estate tax bill.

Married couples can combine their thresholds, so a married couple's estate can be worth up to $27.22 million in 2024 before owing federal tax. This further reduces the number of estates affected. State taxes, however, can explore to much smaller estates, so it is still worth checking your state's rules even if federal tax seems unlikely.

What happens if the estate does not have enough money to pay

If the estate's debts, taxes, and expenses exceed its assets, it is considered insolvent. The executor must follow state law about the order in which creditors and heirs are paid. Typically, funeral expenses and estate administration costs come first, then taxes, then other debts like credit cards or mortgages, and finally whatever is left goes to heirs.

In an insolvent estate, heirs may receive nothing, or only a partial inheritance. The executor cannot pay heirs before paying taxes and other creditors, even if the will says otherwise. If the estate owns real estate or other valuable assets, the executor may sell them to raise cash. This is one reason why estates with significant tax liability are sometimes settled slowly — the executor needs time to sell property at a fair price rather than at a forced sale.

The difference between estate tax and income tax on inherited money

Heirs do not owe personal income tax on money or property they inherit. This is true whether the estate paid estate tax or not. If you inherit $100,000, you do not report it as income on your tax return. The estate tax is separate and is paid before you receive anything.

However, if inherited assets later produce income — such as rental income from inherited real estate or dividends from inherited stocks — you will owe income tax on that new income. You also may owe capital gains tax if you sell inherited property for more than it was worth when you inherited it. But the inheritance itself is not taxable income.

How to learn about an estate will owe tax

The first step is to add up the total value of everything the person owned: real estate, bank accounts, investments, retirement accounts, life insurance, vehicles, and personal property. This total is the estate's gross value. Then subtract any debts, such as mortgages or loans, to get the net estate value.

Compare that net value to the federal threshold for the year of death and to your state's threshold if your state has an estate or inheritance tax. If the estate is below both thresholds, no estate tax is owed. If it is above either threshold, the executor will need to file a tax return and may owe tax.

An estate attorney or tax professional can help calculate the value and determine what forms need to be filed. Many executors hire a professional for this step because the valuation process can be complex, especially when the estate includes business interests, art, or real estate in multiple states.

Frequently Asked Questions

Do heirs have to pay back the estate tax if they receive money?

No. The estate pays the tax before heirs receive their inheritance. Once you inherit money or property, you do not owe anything back to the estate or the government related to that tax. The estate tax is a one-time payment made by the estate, not a debt passed to heirs.

What if someone dies without a will — who pays the estate tax?

The court appoints an administrator (similar to an executor) to manage the estate and pay taxes. The process is the same: the estate pays the tax from its own funds before any money goes to heirs. The administrator has the same legal duty to settle taxes and debts before distributing anything.

Can the executor refuse to pay estate tax?

No. The executor has a legal obligation to pay estate taxes if they are owed. Refusing to pay can result in penalties, interest, and legal action by the IRS. If the executor believes the tax calculation is wrong, they can file a dispute with the IRS, but they cannot straightforward ignore the bill.

Does life insurance count toward the estate tax threshold?

Yes. Life insurance proceeds are included in the estate's value for tax purposes, even though they may pass directly to a named beneficiary outside the will. This can push an estate over the tax threshold. Some people use trusts or other strategies to keep life insurance out of the taxable estate, but that requires planning before death.

What if the estate is in multiple states?

The executor may need to file estate tax returns in more than one state if the person owned property in different states or if multiple states claim the right to tax the estate. Each state has its own rules and important date. An estate attorney can determine which states require a return and help coordinate the filings.