The estate tax is a federal tax on the total value of everything a person owns when they die

When someone passes away, their property, money, investments, and possessions—called their estate—may be subject to a federal tax before it goes to heirs. This tax applies only to estates above a certain dollar threshold. The Internal Revenue Service (IRS) collects it, and the person's executor (the person named to handle the estate) is responsible for filing the tax return and paying what is owed.

Most people's estates never pay this tax because the threshold is high. For 2024, the federal estate tax applies only to estates worth more than $13.61 million. This number changes each year and is set by Congress. If your estate is below that amount, no federal estate tax is due, even if you have significant assets.

Some states also have their own estate taxes with lower thresholds. A handful of states tax estates worth $1 million or more, while others have no state estate tax at all. The state where you lived when you died determines whether state estate tax applies.

Key Takeaways

  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, and this threshold changes yearly.
  • The executor of an estate is responsible for determining whether estate tax is owed and filing the necessary forms with the IRS.
  • Some states impose their own estate taxes on smaller amounts, so you may owe state tax even if federal tax does not explore.
  • The tax rate on taxable estates ranges from 18 to 40 percent, depending on how much the estate exceeds the threshold.
  • Certain gifts and transfers during your lifetime can reduce the size of your taxable estate.

How the estate tax is calculated

The executor starts by adding up the total value of everything in the estate: real estate, bank accounts, investments, vehicles, jewelry, life insurance proceeds, and retirement accounts. This total is called the gross estate. From this amount, certain debts and expenses are subtracted—funeral costs, outstanding mortgages, medical bills, and estate administration fees. The result is the taxable estate.

If the taxable estate exceeds the federal threshold ($13.61 million in 2024), the amount over the threshold is taxed. The tax rate starts at 18 percent on the smallest amounts over the threshold and increases to 40 percent on the largest amounts. For example, if an estate is worth $14.61 million, only the $1 million above the threshold is taxed, not the entire $14.61 million.

The executor files IRS Form 706 (the estate tax return) within nine months of the person's death. If the estate does not owe federal tax, no form is required, though some executors file anyway to document the estate's value for state purposes or to lock in the value for other tax reasons.

Who typically pays estate tax

Estate tax affects a small portion of the population because the threshold is so high. Wealthy individuals with large investment portfolios, significant real estate holdings, or valuable business interests are most likely to have taxable estates. Families that own farms or businesses worth millions may also face estate tax, though special rules sometimes allow them to value the property lower for tax purposes.

The tax is paid from the estate's assets before money is distributed to heirs. If the estate does not have enough liquid cash (money in bank accounts), the executor may need to sell assets like stocks or real estate to pay the tax bill. This can affect how much heirs ultimately receive.

Spouses have a special advantage: property left to a surviving spouse is not subject to federal estate tax, no matter the amount. This is called the marital deduction. However, when the surviving spouse dies, their entire estate (including what they inherited) may be taxable if it exceeds the threshold.

The difference between estate tax and inheritance tax

Estate tax and inheritance tax are often confused because they both involve money passing after death, but they work differently. Estate tax is paid by the estate itself before heirs receive anything. Inheritance tax is paid by the people who receive the money—the heirs—and only a few states have it.

If you live in a state with inheritance tax, heirs may owe tax on what they inherit, depending on their relationship to the deceased and the amount received. A spouse or child might pay nothing, while a more distant relative could owe tax. Six states currently have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These states do not have federal estate tax, but they do have their own inheritance tax system.

Understanding which tax applies depends on where you lived and the size of your estate. A tax professional can clarify what your heirs might owe in your specific situation.

Ways to reduce a taxable estate during your lifetime

People with large estates sometimes use legal strategies to reduce the amount subject to tax. One common method is gifting—giving money or property to family members while you are alive. In 2024, you can give up to $18,000 per person per year without reporting it to the IRS or using any of your lifetime exemption. Spouses can combine their limits, allowing a married couple to give $36,000 per person annually.

Another strategy is establishing a trust. Certain types of trusts, like an irrevocable life insurance trust, can remove the value of a life insurance policy from your taxable estate. A charitable remainder trust allows you to donate to charity while reducing your estate's taxable value. These strategies require legal documents and ongoing administration, so they are most useful for larger estates.

Some people also use their lifetime exemption strategically. The $13.61 million threshold in 2024 is your lifetime exemption—the total amount you can pass to heirs (other than a spouse) without owing federal tax. You can use part of this exemption during your lifetime through large gifts, or save it all for after death. A tax attorney or estate planner can help you decide which approach makes sense for your situation.

What happens if estate tax is not paid

If an estate owes federal tax and the executor does not pay it, the IRS will pursue collection. Interest and penalties accumulate, and the IRS can place a lien on estate assets. This can delay the distribution of money to heirs and create legal complications.

The executor has a legal duty to pay taxes owed before distributing the estate to beneficiaries. If they distribute money without paying taxes first, they can be held personally liable for the unpaid amount. This is why executors often work with tax professionals to may support all obligations are met.

If you think an estate might owe tax, the executor should consult a tax professional or attorney early. They can help determine what is owed, file the return on time, and arrange payment before distributing assets to heirs.

State estate and inheritance taxes

Twelve states and the District of Columbia have some form of estate or inheritance tax. The rules vary widely by state, and thresholds are often much lower than the federal level. Washington state, for example, has an estate tax on estates worth more than $2.193 million in 2024. Massachusetts taxes estates over $1 million. Some states tax only estates above $5 million or $6 million.

If you own property in multiple states or have recently moved, you may need to consider taxes in more than one state. The state where you were a resident when you died typically has the primary claim on estate tax, but states where you owned real estate may also try to tax that property.

Checking your state's tax laws is important if you have a substantial estate. Your state's department of revenue website lists current thresholds and rates, or a local tax professional can advise you on what applies in your situation.

Frequently Asked Questions

Do I have to pay estate tax if I leave money to my children?

Only if your total estate exceeds the federal threshold ($13.61 million in 2024). The relationship between you and your heirs does not matter for federal estate tax—the tax depends on the estate's size, not who receives it. However, some states have inheritance taxes that do consider the heir's relationship to you.

Can I avoid estate tax by putting everything in a trust?

A revocable trust (one you can change during your lifetime) does not reduce estate tax because the IRS still counts it as part of your taxable estate. Certain irrevocable trusts can reduce your taxable estate, but they require legal setup and have ongoing requirements. A tax attorney can explain which trusts might help in your situation.

What if my estate is worth exactly the threshold amount?

If your estate equals the threshold, no tax is owed because tax applies only to the amount that exceeds the threshold. For example, a $13.61 million estate in 2024 would owe nothing. An estate worth $13.62 million would owe tax only on the $10,000 above the threshold.

Does life insurance count toward the estate tax threshold?

Yes, life insurance proceeds are included in your taxable estate unless the policy is owned by someone else or held in an irrevocable trust. This can push an estate over the threshold even if other assets are modest. Some people use life insurance trusts to keep the proceeds out of their taxable estate.

What if the threshold changes after I die?

The threshold in effect when you die is what applies to your estate. Congress sets the threshold, and it changes yearly. Your executor uses the threshold for the year of your death to determine whether tax is owed, not the threshold from when you were alive.