Estate tax is a federal tax on the total value of everything a person owns when they die
When someone passes away, the federal government may tax the money, property, investments, and other assets they leave behind—called their estate. This tax applies only to estates above a certain dollar amount, which changes every year. Most people's estates fall below this threshold and owe no federal estate tax at all.
Estate tax is separate from income tax or property tax. It is paid from the estate's assets before money and property are distributed to heirs. Some states also charge their own estate tax or inheritance tax, which works differently and has lower thresholds than the federal version.
Key Takeaways
- Federal estate tax only applies to estates worth more than a set amount, which was $13.61 million per person in 2024 and changes yearly based on inflation.
- The tax rate on estates above the threshold is a flat 40 percent, applied only to the amount over the limit.
- Most people never pay federal estate tax because their total assets fall below the threshold.
- Some states impose their own estate or inheritance taxes with much lower thresholds, so a state tax bill is possible even when federal tax is not.
- The threshold is set to drop significantly in 2026 unless Congress changes the law, which would affect far more estates.
How the federal threshold works
The federal government does not tax every estate. Instead, there is a threshold—a dollar amount below which no federal estate tax is owed. In 2024, that threshold is $13.61 million per person. An estate worth $10 million owes nothing. An estate worth $15 million owes tax only on the $1.39 million above the threshold.
This threshold is adjusted each year for inflation, so it rises slightly annually. It also depends on whether you are married. A married couple can combine their thresholds, meaning their joint estate can be worth up to $27.22 million in 2024 before federal tax applies.
The threshold is temporary. Under current law, it is scheduled to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress votes to extend it. This change would mean far more estates would owe tax.
The tax rate and how it is calculated
If an estate does exceed the threshold, the tax rate is a flat 40 percent on the amount over the limit. This is the highest tax rate in the federal income tax system. The calculation is straightforward: subtract the threshold from the estate's total value, then multiply by 0.40.
For example, if an estate is worth $14 million and the threshold is $13.61 million, the taxable amount is $390,000. The estate tax owed would be $156,000 (40 percent of $390,000). The remaining $13.844 million goes to heirs.
The estate's executor or administrator is responsible for filing the estate tax return with the IRS and paying the tax before distributing assets to beneficiaries. The return must be filed within nine months of the person's death, though an extension can be requested.
State estate and inheritance taxes
Twelve states and the District of Columbia charge their own estate tax, separate from the federal tax. These state taxes have much lower thresholds—typically between $1 million and $6 million—so estates that owe no federal tax may still owe state tax.
Six states charge an inheritance tax instead, which works differently. An inheritance tax is paid by the person who receives the money or property, not by the estate itself. The tax rate and threshold depend on the relationship between the deceased and the heir—spouses and children often pay nothing or a lower rate, while more distant relatives or unrelated people pay more.
If you live in or own property in a state with an estate or inheritance tax, the executor will need to file a separate return with that state. The rules vary significantly by state, so checking your state's tax authority website is important if the estate is large.
What counts as part of an estate
An estate includes nearly everything a person owned at death: a house, bank accounts, stocks and bonds, retirement accounts, life insurance proceeds, vehicles, jewelry, art, and business interests. It also includes the value of certain gifts made within three years of death, in some cases.
Some assets pass outside the estate and are not subject to estate tax. These include money in a payable-on-death bank account (which goes directly to the named person), property held as "joint tenants with rights of survivorship" (which passes automatically to the surviving owner), and assets in a living trust (which bypass probate and may avoid estate tax depending on how the trust is structured).
Life insurance proceeds are included in the estate unless the policy is owned by someone other than the deceased or held in an irrevocable life insurance trust. This is a common source of surprise for families—a $1 million life insurance payout can push an estate over the threshold.
Ways to reduce estate tax
People with large estates often work with an attorney or tax professional to reduce the tax burden on their heirs. Common strategies include giving money or property to family members during their lifetime (up to a certain annual amount without triggering gift tax), establishing a trust, or making charitable donations.
Married couples can use a strategy called portability, which allows the surviving spouse to use the deceased spouse's unused threshold. This effectively doubles the threshold for the surviving spouse's later estate, reducing or eliminating tax when the second spouse dies.
These strategies require planning and legal documents, and the rules are complex. Anyone with a large estate should discuss options with an estate planning attorney or tax professional before deciding what approach makes sense for their situation.
What happens if estate tax is owed
When an estate owes federal tax, the executor must file Form 706 (the estate tax return) with the IRS within nine months of death. The executor then pays the tax from estate assets before distributing money and property to heirs. If the estate does not have enough liquid cash to pay the tax, the executor may need to sell assets.
If the estate tax is not paid on time, the IRS charges interest and penalties. The executor can request a nine-month extension to file, but the tax itself is still due nine months after death unless the IRS grants additional time.
Heirs do not personally owe estate tax—the estate pays it. However, if the estate runs out of money paying the tax, heirs receive less than they would have otherwise. This is why some families with large estates plan ahead to minimize the tax burden.
Frequently Asked Questions
Do I have to pay estate tax if my parent dies?
Only if your parent's total estate exceeds the federal threshold ($13.61 million in 2024) or your state's threshold. The estate itself pays the tax, not the heirs. Most estates fall below the threshold and owe no federal tax. If your parent lived in a state with an estate or inheritance tax, that state's lower threshold may explore instead.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before assets are distributed. Inheritance tax is paid by the person who receives the money or property, and the rate depends on their relationship to the deceased. Only six states use inheritance tax; most use estate tax or neither.
Can I avoid estate tax by putting my house in my child's name?
Transferring property to avoid estate tax is complicated and may trigger gift tax or other consequences. Putting a house in a child's name during your lifetime can also affect property tax, capital gains tax, and creditor protection. An estate planning attorney can explain the trade-offs for your specific situation.
Will the estate tax threshold change in 2026?
The current threshold is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress votes to extend it. This would affect significantly more estates. Monitor updates from Congress or consult a tax professional if you think your estate might be affected.
Who files the estate tax return?
The executor or administrator of the estate files Form 706 with the IRS. If the estate is small and owes no tax, no return is required. The executor should consult a tax professional or attorney to determine whether a return must be filed.