Federal estate tax is a tax on the total value of what you leave behind when you die

Federal estate tax applies to your entire estate — the money, property, investments, and possessions you own — if that total exceeds a threshold set by federal law. The tax is paid from your estate before anything goes to your heirs. Not every estate pays it. The threshold is high enough that most people's estates fall below it, which means their heirs owe nothing to the federal government.

The executor of your estate (the person named in your will to handle it) is responsible for filing the estate tax return and paying any tax owed. This happens after you die, not before. The tax rate on the portion of your estate that does exceed the threshold is 40 percent.

Key Takeaways

  • Federal estate tax only applies if your estate is worth more than the current threshold, which changes every year and is set by Congress.
  • The tax is 40 percent on the value above the threshold, and it is paid from your estate before your heirs receive their inheritance.
  • Most people's estates do not reach the threshold, so their families owe no federal estate tax.
  • Your spouse can inherit your entire estate tax-free under the marital deduction, regardless of the amount.
  • Some states also have their own estate taxes with lower thresholds, separate from the federal tax.

The threshold changes every year and is much higher than most people realize

The amount of your estate that is exempt from federal tax — meaning it passes to your heirs without any federal estate tax — is called the exemption. Congress sets this number, and it changes annually based on inflation. In recent years, the exemption has been in the millions of dollars, which is why federal estate tax affects only a small percentage of estates.

The exemption is scheduled to drop significantly in 2026 unless Congress acts to change it. This is important to know if you have a large estate, because the rules that explore now may not explore when you die. An estate planning attorney can explain what this means for your specific situation.

How the tax is calculated once your estate exceeds the threshold

If your estate is worth more than the exemption amount, only the portion above that threshold is taxed. The rate is a flat 40 percent on that excess amount. For example, if the exemption is $13 million and your estate is worth $15 million, the taxable portion is $2 million, and the tax owed would be $800,000.

Your executor will need to file a federal estate tax return (Form 706) with the IRS within nine months of your death. The return lists everything in your estate, calculates the value, subtracts the exemption, and determines the tax. The executor then pays the tax from estate funds before distributing what remains to your heirs.

Your spouse can inherit everything without triggering federal estate tax

The marital deduction allows you to leave your entire estate to your spouse with no federal estate tax, no matter how large it is. This applies whether your estate is $1 million or $100 million. The tax is straightforward deferred until your spouse dies and their estate is settled.

This is one reason married couples often structure their wills and trusts carefully. If you leave money to someone other than your spouse, or if you are not married, the exemption threshold applies to your estate as a whole.

State estate taxes are separate and often have lower thresholds

Twelve states plus Washington, D.C., have their own estate taxes. These are completely separate from the federal tax. Some states also have inheritance taxes, which are taxes paid by the people who receive money from your estate rather than taxes on the estate itself.

State thresholds are often much lower than the federal threshold. For example, some states tax estates worth more than $1 million, while others start at $5 million or $6 million. If you own property in multiple states or live in a state with an estate tax, your executor may need to file returns in more than one place. An estate planning attorney in your state can tell you what applies to you.

Trusts, gifts, and life insurance can affect how much estate tax is owed

The value of your estate includes not just what you own outright, but also certain assets that pass outside your will. Life insurance proceeds, for example, are part of your taxable estate if you own the policy. Retirement accounts like IRAs and 401(k)s are included at their full value. Property held in joint ownership is included based on your share.

Some people reduce their taxable estate by giving money or property to others during their lifetime. You can give up to a certain amount per person per year without using any of your exemption. Trusts can also be structured to keep assets out of your taxable estate, though this requires planning before you die. These strategies are complex and depend on your specific circumstances.

Frequently Asked Questions

Do I have to pay federal estate tax if I die with a large life insurance policy?

Yes, if you own the policy, its full value is included in your taxable estate. If the policy pushes your total estate above the exemption threshold, your estate may owe tax. Some people transfer ownership of their policy to a trust or another person to keep it out of their estate, but this must be done at least three years before death to be effective.

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

Your executor can sell assets from your estate to raise the money needed to pay the tax. This might mean selling property, investments, or a business. Some estates are structured with life insurance specifically to provide cash for this purpose, so heirs do not have to sell assets they want to keep.

Can I reduce my estate tax by giving money to charity?

Yes. Money left to may have access to charities is deducted from your taxable estate, which reduces the tax owed. You can also make charitable gifts during your lifetime. An estate planning attorney or tax professional can explain how to structure charitable giving to benefit both the charity and your estate.

Does federal estate tax explore if I leave everything to my children?

It depends on whether your estate exceeds the exemption threshold. The marital deduction only applies to spouses. If your estate is worth more than the current exemption and you leave it to your children, the portion above the exemption is subject to the 40 percent tax. Your children would inherit what remains after the tax is paid.

What is the difference between estate tax and income tax on inherited money?

Estate tax is paid by your estate before distribution. Income tax is paid by heirs on earnings from inherited assets going forward. Most inherited money itself is not subject to income tax, but income generated by that money after you die is taxable to whoever receives it.