What estate tax is and who pays it

Estate tax is a tax on the total value of everything a person owns when they die — their house, bank accounts, investments, vehicles, and other property. The estate (not the heirs) pays this tax before the money and property are distributed to family members or beneficiaries.

The federal government charges estate tax only on estates larger than a certain threshold. That threshold changes year to year. In 2024, federal estate tax applies only to estates worth more than $13.61 million. Most people's estates fall below this amount and owe no federal estate tax at all.

Some states also charge their own estate tax or inheritance tax on smaller amounts. A few states tax estates starting at $1 million or less. If you live in or own property in a state with an estate tax, your estate may owe state tax even if it owes nothing to the federal government.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, so most estates pay nothing.
  • Some states charge estate tax or inheritance tax on much smaller amounts, starting as low as $1 million.
  • The executor of the estate (usually named in the will) is responsible for calculating and paying the tax.
  • Certain assets pass to spouses and charities tax-free, which can reduce or eliminate the tax owed.
  • The tax is paid from the estate's money before heirs receive their inheritance.

How the federal threshold works

The $13.61 million threshold (called the exemption amount) is not permanent. Congress set it to expire at the end of 2025, after which it will drop to roughly $7 million per person unless lawmakers extend it. This means an estate worth $8 million might owe no tax in 2024 but could owe tax in 2026 if the exemption drops.

Each person gets their own exemption. A married couple can combine their exemptions, so a couple could have an estate worth up to $27.22 million in 2024 and still owe no federal estate tax. This is called portability — the surviving spouse can use both exemptions.

The exemption applies only once per person, during their lifetime or at death. You cannot use it now and then use it again later. If you give away $5 million to family members while alive, you reduce the exemption available to your estate after you die.

What counts as part of the estate

The estate includes everything you own outright: your house (if you own it alone), cars, bank accounts, stocks, bonds, retirement accounts, life insurance proceeds, and personal property like jewelry or art. It also includes your share of property you own with others, unless it passes automatically to a surviving owner.

Some assets pass outside the estate and avoid estate tax entirely. Money in a payable-on-death bank account goes directly to the named beneficiary. Life insurance proceeds go to whoever you named as the beneficiary. A house owned as "joint tenants with right of survivorship" passes automatically to the other owner. These assets are not part of the taxable estate.

Retirement accounts like IRAs and 401(k)s are included in the estate's value for tax purposes, even though they pass directly to named beneficiaries. The same is true of property held in a revocable living trust — it counts toward the estate even though it avoids probate.

Deductions that reduce the tax

Not everything in the estate is taxed. Marital deduction allows you to leave an unlimited amount to a surviving spouse with no estate tax. This is one of the largest tax breaks available. If you leave $50 million to your spouse, none of it is taxed at death.

Gifts to may have access to charities are also deducted from the taxable estate. If your estate is worth $20 million and you leave $5 million to a charity, only $15 million is subject to tax. The charity must be a may have access to organization — the IRS maintains a searchable database of these.

Debts owed by the estate reduce its value. If you die with a $300,000 mortgage, $50,000 in medical bills, and $20,000 in credit card debt, the estate subtracts these amounts before calculating the tax. Funeral expenses and the cost of administering the estate are also deductible.

How the tax is calculated and paid

The executor (the person named in your will to manage your estate) is responsible for calculating the estate tax. They must file 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 death, though an extension can be requested.

The tax rate is 40 percent on the amount above the exemption. If an estate is worth $15 million in 2024, the first $13.61 million is exempt, leaving $1.39 million taxable. The tax owed would be $1.39 million × 40%, or $556,000. This money comes from the estate's assets before heirs receive anything.

The executor pays the tax from estate funds — usually by selling assets if there is not enough cash on hand. This can force the sale of a family business or farm if the heirs do not have liquid money available. Some families plan ahead by buying life insurance to cover the expected tax.

State estate and inheritance taxes

Twelve states plus Washington, D.C. charge their own estate tax. The thresholds vary widely. Massachusetts and Oregon tax estates starting at $1 million. New York taxes estates starting at $6.94 million (as of 2024). Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Rhode Island, Vermont, and Washington also have estate taxes at different thresholds.

Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — charge inheritance tax instead. Inheritance tax is paid by the heirs, not the estate, and the rate depends on who inherits. Spouses and children often pay nothing or a lower rate, while distant relatives or non-relatives pay more.

If you own property in multiple states, you may owe estate tax in more than one. A person who lives in New York but owns a vacation home in Florida owes New York estate tax on the whole estate but may owe Florida tax on the vacation home. The rules are complex, and an estate attorney or tax professional can clarify what applies to your situation.

Planning strategies to reduce estate tax

If your estate is likely to exceed the federal exemption (or your state's threshold), several strategies can reduce the tax. Gifting during your lifetime removes money from the estate. You can give up to $18,000 per person per year (in 2024) without using any of your exemption. Over time, this shrinks the taxable estate.

A revocable living trust does not reduce estate tax, but it avoids probate and keeps your affairs private. An irrevocable life insurance trust (ILIT) can remove life insurance proceeds from the taxable estate if set up correctly. A charitable remainder trust lets you donate to charity while receiving income during your lifetime, reducing the taxable estate.

Married couples can use portability to combine exemptions, effectively doubling the amount that passes tax-free. This requires filing a tax return after the first spouse dies, even if no tax is owed, to preserve the unused exemption for the surviving spouse.

These strategies are complex and depend on your specific situation. An estate attorney or tax professional can review your assets and recommend the approach that makes sense for you.

Frequently Asked Questions

Does my estate owe federal tax if it is worth $5 million?

No. In 2024, federal estate tax applies only to estates worth more than $13.61 million. Your $5 million estate would owe no federal tax. However, check whether your state charges estate or inheritance tax, as some states tax much smaller estates.

If I leave money to my spouse, do they have to pay estate tax?

No. The marital deduction allows you to leave an unlimited amount to a surviving spouse with no estate tax. The tax is deferred until the surviving spouse dies, at which point their estate (including what they inherited from you) is taxed if it exceeds the exemption.

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

The executor may need to sell assets — stocks, real estate, or a business — to raise the money. This is why some families buy life insurance before death; the insurance proceeds provide cash to pay the tax without forcing a sale. An estate attorney can discuss options specific to your situation.

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 exemption. Larger gifts use your exemption but do not trigger a tax. Over time, strategic gifting can reduce the size of your taxable estate.

Does the exemption amount change every year?

Yes, it adjusts for inflation. The current $13.61 million exemption is set to drop to roughly $7 million at the end of 2025 unless Congress extends it. Check the IRS website or speak with a tax professional to confirm the current year's amount.