The person who inherits the estate usually pays, but the estate itself may cover it first

Estate tax is a tax on the total value of everything a person owns when they die — their house, bank accounts, investments, and possessions. The tax is owed by the estate (the collection of assets left behind), not by the person who died. In practice, the executor or administrator of the estate — the person named to handle the estate — pays the tax from the estate's money before distributing what remains to heirs and beneficiaries.

If the estate doesn't have enough cash to pay the tax, the executor may need to sell assets like real estate or investments to raise the money. This means heirs could receive less than they would have if the tax hadn't been owed. In some cases, if the estate is small enough, no federal estate tax is owed at all.

Key Takeaways

  • Federal estate tax only applies to estates larger than $13.61 million (as of 2024), so most estates pay nothing at the federal level.
  • The executor of the estate pays the tax using money from the estate before heirs receive their inheritance.
  • Some states have their own estate or inheritance taxes that explore to smaller estates than the federal threshold.
  • If the estate doesn't have enough liquid cash, the executor may sell property or investments to pay the tax bill.
  • The amount heirs receive can be reduced if estate taxes are owed, since the tax is paid from the estate's assets.

Federal estate tax thresholds and who actually owes it

The federal government only taxes estates that exceed a certain value. For 2024, that threshold is $13.61 million per person. This means if someone dies with an estate worth $10 million, no federal estate tax is owed. If the estate is worth $15 million, tax is owed only on the amount above $13.61 million.

Most people's estates fall well below this threshold, so federal estate tax affects only wealthy estates. The executor still has to file a federal estate tax return (Form 706) if the estate exceeds the threshold, even if little or no tax is actually owed. The threshold changes each year and is set to drop significantly in 2026 unless Congress changes the law.

Married couples can combine their thresholds, so a married couple could have an estate worth up to $27.22 million in 2024 before owing federal tax. This is called portability, and the surviving spouse must file a return to claim it even if no tax is owed.

State estate and inheritance taxes

Twelve states and Washington, D.C., have their own estate taxes, and six states have inheritance taxes. These state-level taxes often explore to much smaller estates than the federal threshold — some state thresholds are as low as $1 million or $2 million. If someone dies in one of these states, the estate may owe state tax even if it's nowhere near the federal threshold.

An inheritance tax is different from an estate tax: it's paid by the person who receives the inheritance, not by the estate itself. Only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. The tax rate and what's owed depend on who inherits — spouses and children often pay less or nothing, while distant relatives or non-relatives pay more.

If you live in or inherit from someone in a state with an estate or inheritance tax, the executor or the person inheriting needs to understand that state's rules. Some states allow credits for federal estate tax paid, which can reduce the total tax burden.

How the executor pays the tax

The executor is responsible for calculating the estate tax owed and paying it to the IRS and any state tax authority. The executor uses money from the estate to pay the bill — ideally from liquid assets like bank accounts or money market funds. If the estate doesn't have enough cash on hand, the executor may need to sell stocks, bonds, real estate, or other property to raise the money.

The executor must file the federal estate tax return (Form 706) within nine months of the person's death, though an extension can be requested. The return lists all assets, their values, and any deductions or credits the estate qualifies for. Once the IRS approves the return, the executor pays any tax owed.

If the estate owes money to creditors or has unpaid debts, those are typically paid before estate tax. The order matters: debts and expenses come first, then estate tax, then what's left goes to heirs. This is why some heirs receive less than they expected — the estate's value shrinks as bills and taxes are paid.

What reduces the amount of estate tax owed

Several deductions and credits can lower or eliminate estate tax. The most common is the marital deduction, which allows an unlimited amount of assets to pass to a surviving spouse tax-free. This is why many married couples with large estates don't owe federal tax — they leave everything to their spouse, and the tax is deferred until the surviving spouse dies.

The charitable deduction allows estates to reduce their taxable value by the amount left to may have access to charities. An estate worth $20 million that leaves $5 million to charity only pays tax on $15 million (minus the threshold). Some people use this strategy to reduce taxes while supporting causes they care about.

Gifts made during a person's lifetime can also affect estate tax. The IRS allows each person to give away a certain amount per year ($18,000 in 2024) without using any of their lifetime exemption. Larger gifts use up the exemption, which reduces the threshold for estate tax after death.

When heirs or beneficiaries pay instead of the estate

In most cases, heirs don't pay estate tax directly — the estate pays it. However, if the estate doesn't have enough money to cover the tax, heirs may end up paying indirectly by receiving less than they would have otherwise. If an heir receives a specific bequest (like "my daughter gets my car") and the estate runs out of money paying taxes, the heir might not receive that item.

In states with inheritance taxes, the person who inherits may owe tax directly to the state. The amount depends on their relationship to the person who died and the value of what they inherited. A child inheriting from a parent might owe nothing, while a niece inheriting the same amount might owe a percentage.

Some estates are structured so that life insurance proceeds or other assets pass directly to heirs outside the estate, avoiding probate and estate tax. These assets don't go through the executor and aren't subject to estate tax, which is why people sometimes use them as a tax-planning tool.

Planning ahead to reduce estate tax burden

People with large estates often work with an attorney or tax professional to plan how to minimize estate tax. Common strategies include setting up trusts, making gifts during their lifetime, or leaving money to charity. A revocable living trust doesn't reduce estate tax but can avoid probate, which saves time and money. An irrevocable trust can remove assets from the taxable estate, but the person giving up control of those assets.

Married couples can use strategies like portability (mentioned earlier) or a credit shelter trust to make sure both spouses' exemptions are used. Without planning, a surviving spouse might waste the first spouse's exemption, resulting in higher taxes when the surviving spouse dies.

If you expect to leave a large estate, talking to a tax professional or estate attorney before you die can help your heirs pay less in taxes and receive more of what you intended to leave them. These conversations are most useful years in advance, not after someone has already passed away.

Frequently Asked Questions

Do I have to pay estate tax if I inherit money from a relative?

Not usually. The estate pays the tax, not the heirs. However, if you live in a state with an inheritance tax and inherit from someone who wasn't your spouse or parent, you may owe state tax on what you receive. The amount depends on your state's rules and your relationship to the person who died.

What happens if the estate doesn't have enough money to pay the tax?

The executor may sell assets like real estate, stocks, or investments to raise the money. This means heirs receive less in total value because some of the estate's assets had to be sold to cover the tax bill. In rare cases, heirs may need to contribute money to cover the tax, though this is unusual.

Can I reduce estate tax by giving money away before I die?

Yes. You can give away $18,000 per person per year (in 2024) without using any of your lifetime exemption. Larger gifts use up your exemption, which reduces the threshold for estate tax after death. Gifts to spouses and charities have different rules and may not count against your exemption at all.

Does a life insurance payout count toward estate tax?

Yes, life insurance proceeds are included in your taxable estate unless the policy is owned by someone else or held in an irrevocable trust. If you own the policy, the payout goes into your estate and counts toward the threshold for owing tax. Transferring ownership to a trust or another person can keep the proceeds out of your taxable estate.

What's the difference between estate tax and inheritance tax?

Estate tax is paid by the estate itself before heirs receive anything. Inheritance tax is paid by the person who inherits, and the amount depends on their relationship to the person who died. Only six states have inheritance taxes; twelve states and D.C. have estate taxes. Most states have neither.