What the estate tax is and who actually pays it

The estate tax — sometimes called the "death tax" — is a federal tax on the total value of everything a person owns when they die. It applies only to estates above a certain threshold. For 2024, that threshold is $13.61 million per person, which means most people's estates do not owe this tax at all. Your state may have its own estate tax with a much lower threshold, so check your state's rules separately.

The tax is paid by the estate itself before money goes to heirs, not by the people who inherit. If an estate owes the tax, the executor uses estate assets to pay it, which reduces what beneficiaries receive. The federal rate is 40 percent of the amount above the threshold — so a $15 million estate would owe 40 percent of $1.39 million, or roughly $556,000.

The threshold changes every year and is set to drop significantly in 2026 unless Congress acts. Many people plan now to reduce what their estate will owe, even if they do not expect to hit the current threshold, because their estate might cross it by the time they die.

Key Takeaways

  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, but your state may tax estates at much lower thresholds.
  • Giving money or property to family members during your lifetime removes it from your taxable estate and is often the simplest way to reduce estate tax.
  • A revocable living trust does not reduce estate taxes but can help your heirs avoid probate and keep your affairs private after you die.
  • Charitable donations, life insurance trusts, and spousal lifetime access trusts are advanced strategies that require a lawyer to set up correctly.
  • The federal threshold drops in 2026 unless Congress extends it, which may affect your planning timeline.

Giving money away during your lifetime

The simplest and most direct way to reduce estate taxes is to give money or property to your heirs while you are alive. Money you give away is no longer part of your estate, so it is not subject to the estate tax. The IRS allows you to give up to a certain amount per year to each person without reporting it or using any of your lifetime exemption. For 2024, that amount is $18,000 per person per year. A married couple can give $36,000 per year to each child, grandchild, or other person.

You can also give larger amounts — even millions — without owing gift tax, as long as you use your lifetime exemption. Your lifetime exemption is the same as your estate tax exemption: $13.61 million in 2024. Once you use part of it to give money away during your lifetime, that amount is no longer available to shelter your estate from tax after you die. Many people decide this trade-off is worth it, because they reduce their estate and see their heirs benefit from the money while they are still alive.

Gifts to spouses and to charities do not count against your exemption at all. You can give your spouse unlimited money during your lifetime and after death without any tax consequence, as long as your spouse is a U.S. citizen.

Using a revocable living trust to avoid probate

A revocable living trust is a legal document that lets you transfer property into a trust during your lifetime, with you as the trustee. When you die, the trustee (usually someone you name) distributes the property to your heirs without going through probate court. This saves time, money, and privacy — probate records are public, but trust distributions are not.

A revocable living trust does not reduce estate taxes. The property in the trust is still part of your taxable estate because you kept control of it and could change the trust terms at any time. However, if your estate is below your state's threshold and you straightforward want to avoid probate, a revocable living trust is a practical tool. It costs between $1,000 and $3,000 to set up with a lawyer, depending on your state and the complexity of your assets.

You fund the trust by retitling property in the trust's name — for example, changing a house deed from your name to "Jane Smith, Trustee of the Jane Smith Revocable Living Trust." Bank accounts, investment accounts, and vehicles can all be transferred into the trust. When you die, these assets pass directly to your heirs according to the trust document, without delay.

Irrevocable trusts and life insurance strategies

An irrevocable trust is a trust you cannot change or take back once you create it. Because you give up control of the property, it is no longer part of your taxable estate — which means it is not subject to estate tax. The trade-off is that you lose access to the money and cannot change your mind. This strategy works best for people with very large estates who are certain they will not need the money.

A common irrevocable strategy is an irrevocable life insurance trust (ILIT). You transfer a life insurance policy into the trust, and the trust owns the policy. When you die, the insurance payout goes to the trust, not to your estate, so it avoids estate tax. The trust can then distribute the money to your heirs. This is useful if life insurance is a large part of your estate or if you want to make sure the insurance money is available to pay estate taxes without forcing your heirs to sell assets.

Setting up an irrevocable trust requires a lawyer and costs $2,000 to $5,000 or more, depending on complexity. You also need to follow strict rules — for example, an ILIT requires that you not be the trustee, and you cannot be the beneficiary. If you break the rules, the IRS may decide the trust is not valid and the assets count as part of your estate anyway.

Spousal lifetime access trusts and portability

A spousal lifetime access trust (SLAT) is an irrevocable trust that one spouse creates for the benefit of the other spouse and their children. The spouse who creates the trust gives up control of the money, so it leaves their taxable estate. The other spouse can access the money if needed, but it is not part of their estate either — so both spouses benefit from the tax shelter. When the first spouse dies, the trust continues for the surviving spouse and children.

A simpler option for married couples is portability. When the first spouse dies, the surviving spouse can use the deceased spouse's unused exemption in addition to their own. This means a married couple can shelter up to $27.22 million in 2024 without any trust at all — just by filing the right paperwork with the IRS after the first death. Portability requires an estate tax return to be filed, even if the estate does not owe tax, so you need to work with a tax professional or lawyer.

Portability is simpler and cheaper than a SLAT, but it only works if the surviving spouse does not remarry. If the surviving spouse remarries, they lose access to the deceased spouse's exemption. A SLAT is more complex but protects the exemption even if the surviving spouse remarries later.

Charitable giving and donor-advised funds

Donations to may have access to charities reduce your taxable estate and may also lower your income taxes in the year you make the donation. If you give appreciated property — such as stock that has gone up in value — you avoid capital gains tax on the increase, which makes charitable giving especially valuable.

A donor-advised fund (DAF) lets you donate money to a charity account, take the tax deduction when ready, and then recommend grants to charities over time. This is useful if you want to bunch several years of charitable giving into one year for tax purposes, or if you want to give to multiple charities but do not want to manage separate accounts. You can open a DAF through most major investment firms for a small fee.

Another option is a charitable remainder trust, which pays you income for life and then gives the remainder to charity. This removes the remainder from your taxable estate while letting you keep income from the assets. These trusts are complex and require professional setup, but they work well for people with large estates who want to support charity and reduce taxes at the same time.

Planning for the 2026 threshold change

The federal estate tax exemption is scheduled to drop from $13.61 million to roughly $7 million per person in 2026, unless Congress extends the current law. This means estates that are safe from federal tax today might owe tax in 2026. If your estate is between $7 million and $13.61 million, you may want to act before 2026 — for example, by giving money away or setting up an irrevocable trust while the exemption is still high.

Some people use a strategy called "exemption locking" — they create an irrevocable trust and fund it with assets up to their current exemption amount before 2026. Even if the exemption drops, the assets in the trust stay sheltered. This requires careful planning and professional help, because the rules are complex and mistakes can be costly.

If you are unsure whether the threshold change affects you, a tax professional or estate lawyer can review your situation and tell you whether planning now makes sense. The cost of a consultation is usually much less than the tax you might save.

Frequently Asked Questions

Do I need to worry about estate tax if my estate is under $13.61 million?

Not for federal estate tax, but check your state's rules. Many states have their own estate tax with thresholds as low as $1 million or less. Even if you are below both thresholds now, you may want to plan ahead if your estate is likely to grow or if the federal threshold drops in 2026.

If I give money to my kids now, do I have to pay gift tax?

Not if you stay within the annual limit of $18,000 per person per year (or $36,000 if you are married). Larger gifts do not trigger a tax, but they use up your lifetime exemption, which reduces how much you can shelter from estate tax after you die. You do not owe tax either way — you just lose some of your exemption.

Can I change my mind after I set up an irrevocable trust?

No — that is what "irrevocable" means. Once you create it and fund it, you cannot take the money back or change the terms. Some irrevocable trusts have limited modification options under state law, but this varies. Talk to a lawyer before you set one up to make sure you understand what you are giving up.

What happens if I die before my spouse — do they get my exemption?

Yes, through portability. Your executor files an estate tax return after you die, and your surviving spouse can then use your unused exemption in addition to their own. This requires the return to be filed, so make sure your executor knows to do this even if your estate does not owe tax.

Is a revocable living trust worth it if I do not have an estate tax problem?

It depends on your goals. If you want to avoid probate, keep your affairs private, and make it straightforward for your heirs to access your assets after you die, a revocable living trust is useful. If you have a straightforward estate and do not mind probate, you may not need one. A lawyer can help you decide based on your specific situation.