The person who inherits the estate pays the tax, not the deceased's family out of pocket

Estate tax is paid by whoever receives money or property from the deceased person's estate — usually through the executor or estate administrator who settles the account. The tax comes out of the estate's assets before distribution, so if an estate owes $50,000 in federal estate tax, that $50,000 leaves the pool of money available to heirs. The heirs do not write a separate check to the IRS; the executor handles it as part of closing out the estate.

However, most estates never pay federal estate tax at all. The federal threshold is high — $13.61 million for deaths in 2024, though this amount changes yearly and is set to drop in 2026. State estate taxes, where they exist, have lower thresholds and affect far more estates. The key is understanding whether your state has an estate tax and whether the estate's total value crosses that state's line.

Key Takeaways

  • The executor of the estate pays estate tax from the estate's assets, reducing what heirs receive, rather than heirs paying tax separately.
  • Federal estate tax only applies to estates larger than $13.61 million in 2024, a threshold that varies by year.
  • State estate taxes have much lower thresholds — some states start at $1 million or less — and explore in only about a dozen states.
  • The executor must file a federal estate tax return (Form 706) if the estate exceeds the federal threshold, even if no tax is owed.
  • Life insurance proceeds and retirement account beneficiaries are usually not part of the taxable estate, though this depends on how the accounts are titled.

How the executor pays estate tax from the estate itself

When someone dies, the executor (the person named in the will to manage the estate) or the court-appointed administrator gathers all the deceased's assets, pays debts and taxes, and distributes what remains to heirs. If the estate owes federal or state estate tax, the executor pays it from the estate's bank accounts, investments, or by selling assets if necessary. This happens before the heirs receive their inheritance.

The executor does not ask heirs to contribute money. Instead, the tax reduces the total amount available to distribute. If an estate is worth $15 million and owes $500,000 in federal estate tax, the heirs split $14.5 million instead of $15 million. Some states allow the executor to collect the tax proportionally from each heir based on what they inherit, but the executor still initiates the payment to the government.

Federal estate tax thresholds and who actually owes it

The federal estate tax threshold for 2024 is $13.61 million per person. This means an estate must be worth more than $13.61 million for any federal estate tax to be owed. A married couple can combine their thresholds to $27.22 million if they plan correctly, using what is called portability. Most American estates fall well below this line, so federal estate tax is rare.

The threshold is not permanent. Congress set it to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless new legislation extends the higher amount. This change is already written into law, so estates will owe tax on a much smaller amount starting in 2026 unless Congress acts. Families with estates approaching $7 million should discuss this timing with an estate attorney or tax professional.

State estate taxes hit smaller estates and explore in fewer places

About a dozen states have their own estate taxes, separate from federal tax. These state thresholds are much lower than the federal level. Washington State, for example, taxes estates over $2.193 million (in 2024). Massachusetts taxes estates over $1 million. New York taxes estates over $6.94 million. The exact threshold varies by state and changes yearly with inflation adjustments.

If you live in or own property in a state with an estate tax, you need to know that state's specific threshold. An estate worth $3 million might owe nothing federally but could owe state estate tax in Washington or Massachusetts. The executor must file both a federal return (Form 706) and a state return if either threshold is crossed. Some states also have an inheritance tax, which is different — it taxes the heir based on their relationship to the deceased, not the estate's total value.

What assets are included in the taxable estate

The taxable estate includes the deceased's house, bank accounts, investments, vehicles, business interests, and personal property like jewelry or art. It also includes the full value of life insurance proceeds if the deceased owned the policy or had control over it. Retirement accounts like IRAs and 401(k)s are included if the deceased had not named a beneficiary or named the estate as beneficiary.

However, assets with named beneficiaries — such as life insurance with a named beneficiary, a payable-on-death bank account, or a retirement account with a named beneficiary — pass directly to that beneficiary outside the estate and are usually not subject to estate tax. This is why naming beneficiaries correctly is important for tax planning. Jointly owned property with a right of survivorship also passes outside the estate in most cases.

How the executor files the estate tax return

If the estate exceeds the federal threshold, the executor must file Form 706 (United States Estate Tax Return) with the IRS within nine months of the death, even if no tax is owed. Some states require a state estate tax return on a similar timeline. The executor gathers documentation of all assets, their values on the date of death, any debts owed, and charitable donations made from the estate.

The executor may need to hire an appraiser to value real estate, artwork, or a business. They may also need a tax professional or estate attorney to complete the return correctly, especially if the estate is complex. The cost of preparing these returns comes out of the estate as an administrative expense, which reduces the taxable amount slightly.

Strategies to reduce what the estate owes

People with large estates sometimes use legal strategies to reduce the tax burden before death. These include setting up trusts, making annual gifts to family members (up to $18,000 per person in 2024, a limit that changes yearly), donating to charity, or using life insurance trusts. These strategies must be set up before death and require careful planning with an attorney or tax professional.

After someone dies, the executor has limited options. They can deduct funeral expenses, debts the deceased owed, and administrative costs of settling the estate. They can also deduct charitable donations made from the estate. But the core value of the estate is already set, so post-death planning focuses on managing the tax bill rather than reducing it.

Frequently Asked Questions

Do heirs have to pay estate tax out of their own money?

No. The executor pays estate tax from the estate's assets before distributing money to heirs. Heirs receive what is left after taxes and debts are paid. In rare cases, if the estate does not have enough liquid cash, the executor may need to sell assets to pay the tax, which reduces everyone's inheritance.

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

The executor can request an extension from the IRS to pay the tax over time, or sell estate assets to raise the money. If the estate is illiquid (mostly real estate or a business), the executor may need to sell part of it. This is one reason people with large estates sometimes buy life insurance — the proceeds provide cash to pay taxes without forcing asset sales.

Does a surviving spouse have to pay estate tax?

No. Property left to a surviving spouse is usually exempt from federal estate tax through the marital deduction, meaning it passes tax-free. However, state estate taxes may still explore depending on where you live. The surviving spouse's own estate will include this inherited property, so it could trigger tax when the spouse dies later.

Are retirement accounts and life insurance included in the taxable estate?

Life insurance is included if the deceased owned the policy or had control over it. Retirement accounts are included if no beneficiary was named or the estate was named as beneficiary. If a beneficiary is properly named on either, those assets pass outside the estate and usually avoid estate tax, though they may be subject to income tax when the beneficiary withdraws the money.

When does the 2026 threshold change take effect?

The federal estate tax threshold is set to drop to approximately $7 million per person on January 1, 2026, unless Congress extends the current higher threshold. This is already written into law. Families with estates between $7 million and $13.61 million should discuss timing and planning options with an estate attorney before 2026 arrives.