Estate taxes are federal taxes on the total value of everything a person owns when they die
When someone passes away, their property, money, investments, and other assets make up their estate. The federal government taxes the transfer of that estate to heirs—but only if the estate is large enough. Most estates pay nothing because the federal threshold is high. In 2024, the federal estate tax applies only to estates worth more than $13.61 million. That number changes each year and is set by Congress.
Estate taxes are separate from income taxes or property taxes. They are paid from the estate itself before heirs receive their inheritance. Some states also impose their own estate taxes or inheritance taxes, which have lower thresholds and can affect smaller estates.
Key Takeaways
- Federal estate tax applies only to estates exceeding $13.61 million in 2024, a threshold that changes yearly and is set by Congress.
- Estate taxes are paid from the deceased person's assets before heirs inherit, and the tax rate is 40 percent on the amount over the threshold.
- Some states impose their own estate or inheritance taxes with much lower thresholds, so you may owe state tax even if federal tax does not explore.
- The executor of the estate is responsible for filing the federal estate tax return (Form 706) if the estate exceeds the threshold.
- Certain transfers—to spouses, charities, and some gifts made during life—can reduce or eliminate estate tax liability.
How the federal estate tax threshold works
The federal threshold is called the exemption. In 2024, each person can leave up to $13.61 million to heirs without owing federal estate tax. A married couple can combine their exemptions, so together they can leave $27.22 million tax-free.
This threshold is not permanent. Congress set it to expire at the end of 2025, after which it will drop to roughly $7 million per person (adjusted for inflation) unless Congress acts. The threshold also changes slightly each year based on inflation. You can find the current year's exemption on the IRS website.
If an estate exceeds the threshold, only the amount over the limit is taxed. The tax rate on that excess is 40 percent. For example, an estate worth $14 million in 2024 would owe tax on $390,000 (the amount over $13.61 million), which equals $156,000 in federal estate tax.
State estate and inheritance taxes
Twelve states and the District of Columbia impose their own estate taxes. These states are Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Each state sets its own threshold, which is typically much lower than the federal level—often between $1 million and $6 million.
Some states impose inheritance taxes instead of estate taxes. An inheritance tax is paid by the heirs themselves rather than by the estate. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. Maryland and New Jersey have both.
If you live in a state with an estate or inheritance tax, you may owe state tax even if your estate is below the federal threshold. The executor or heirs should check their state's rules, as important date and filing requirements differ from federal requirements.
What counts toward the estate and what does not
The estate includes almost everything the person owned: a house, bank accounts, investments, retirement accounts, life insurance proceeds, vehicles, and personal property like jewelry or art. It also includes the value of certain business interests and property held in trusts.
Some assets pass outside the estate and are not subject to estate tax. These include property held in a payable-on-death account (where you name a beneficiary directly), life insurance proceeds if the policy is owned by someone other than the deceased, and assets in a properly structured trust. Retirement accounts like IRAs and 401(k)s pass to named beneficiaries and are not part of the taxable estate, though they may be subject to income tax when heirs withdraw the money.
Debts owed by the deceased—mortgages, credit cards, medical bills—reduce the value of the estate before tax is calculated. The executor pays these debts from estate assets first.
Deductions and transfers that reduce estate tax
Even if an estate exceeds the threshold, certain transfers are not taxed. Money or property left to a surviving spouse is completely exempt from estate tax, as long as the spouse is a U.S. citizen. Gifts to charities are also fully deductible. These deductions can significantly reduce or eliminate estate tax liability.
During their lifetime, a person can also give away money or property without triggering estate tax, up to an annual limit. In 2024, you can give up to $18,000 per person per year without reporting it. Gifts above that amount count against your lifetime exemption but do not result in a tax payment—they straightforward reduce the exemption available at death.
Some people use trusts, family limited partnerships, or other strategies to transfer wealth while minimizing estate tax. These arrangements are complex and require the help of an attorney or tax professional to set up correctly.
Who files the estate tax return and when
The executor (the person named in the will to manage the estate) is responsible for filing the federal estate tax return if the estate exceeds the exemption. The form is called Form 706, and it must be filed with the IRS within nine months of the person's death. If the important date cannot be met, the executor can request an extension.
Filing Form 706 is required even if no tax is owed, as long as the estate exceeds the threshold. The return reports the value of all assets, debts, deductions, and any gifts made during life. State estate or inheritance tax returns have their own important date and forms, which vary by state.
Most executors work with an accountant or tax attorney to prepare and file these returns, as the process involves valuing assets, gathering documents, and calculating deductions. The cost of professional help is paid from the estate.
Planning to reduce or avoid estate tax
People with large estates often work with an estate planning attorney to arrange their affairs in ways that reduce or eliminate estate tax for their heirs. Common strategies include setting up trusts, making lifetime gifts, establishing charitable giving plans, and using life insurance in specific ways.
If you expect your estate to be large, it is worth having a conversation with an attorney or financial advisor about your options. The cost of planning now is usually far less than the tax bill later. Keep in mind that the federal exemption is scheduled to drop significantly at the end of 2025, which may affect planning decisions.
Even if your estate is below the current threshold, state taxes or future changes to federal law could affect your heirs. A professional can help you understand your specific situation and what steps, if any, make sense for your family.
Frequently Asked Questions
Does everyone have to pay estate tax?
No. Most estates pay no federal estate tax because the threshold is high—$13.61 million in 2024. Only about 0.1 percent of estates owe federal tax. However, some states have lower thresholds, so heirs in those states may owe state tax even if federal tax does not explore.
Can I avoid estate tax by giving money away before I die?
You can give away up to $18,000 per person per year in 2024 without any tax or reporting. Larger gifts count against your lifetime exemption but do not trigger a tax payment. Gifts to spouses and charities are unlimited and do not count against your exemption at all.
What happens if the executor does not file Form 706?
If the estate exceeds the threshold and Form 706 is not filed, the IRS can assess penalties and interest. The executor has a legal duty to file if required. If you are an executor unsure whether filing is necessary, consult a tax professional or attorney.
Is life insurance part of the taxable estate?
Life insurance proceeds are included in the taxable estate if the deceased person owned the policy. However, if someone else owns the policy (such as an adult child or a trust), the proceeds pass outside the estate and are not taxed. This is a common estate planning technique.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before heirs receive their inheritance. Inheritance tax is paid by the heirs themselves. Only six states have inheritance taxes, and they generally explore to larger inheritances. The tax burden and rates differ between the two types.