The person who inherits the estate pays the tax, not the person who died
Estate tax is paid by the estate itself — the collection of everything the person left behind — before money and property are divided among heirs. The executor (the person named to handle the estate) pays it from the estate's assets. This means heirs receive less than they would have if no tax were owed.
Estate tax only applies to estates above a certain value. For 2024, the federal threshold is $13.61 million. Most estates never owe it. If your estate is below that number, you do not file a federal estate tax return at all.
A handful of states also charge their own estate tax or inheritance tax, with much lower thresholds — sometimes as low as $1 million. The state where the person lived when they died determines whether state tax applies.
Key Takeaways
- Federal estate tax applies only to estates worth more than $13.61 million in 2024, and most people's estates fall below this amount.
- The executor pays estate tax from the estate's money before distributing anything to heirs, which reduces what each heir receives.
- Twelve states charge their own estate tax or inheritance tax with thresholds ranging from $1 million to $9 million, depending on the state.
- The threshold for federal estate tax is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.
- Married couples can combine their thresholds, so a married couple's federal threshold is roughly $27.2 million in 2024.
How the federal estate tax threshold works
The $13.61 million threshold in 2024 is called the exemption amount. Only the portion of an estate above this number is taxed. The tax rate on that excess is 40 percent.
This threshold changes every year based on inflation. It was $12.92 million in 2023 and will be $13.99 million in 2025. In 2026, unless Congress acts, it is scheduled to drop to roughly $7 million per person — a significant change that would affect far more estates.
For a married couple, each spouse has their own exemption. If one spouse dies and does not use their full exemption, the surviving spouse can claim the unused amount. This is called portability. It means a married couple can shield roughly $27.2 million in 2024 without owing federal estate tax.
Which states charge estate or inheritance tax
Twelve states and the District of Columbia charge their own estate tax or inheritance tax. The rules vary significantly by state.
| State | Tax Type | Threshold |
|---|---|---|
| Connecticut | Estate tax | $12.92 million |
| Delaware | Estate tax | $5.49 million |
| Illinois | Estate tax | $4 million |
| Iowa | Inheritance tax | No threshold; rates vary by heir relationship |
| Kentucky | Inheritance tax | No threshold; rates vary by heir relationship |
| Maine | Estate tax | $6.94 million |
| Maryland | Estate tax | $5.25 million |
| Massachusetts | Estate tax | $1 million |
| Minnesota | Estate tax | $3 million |
| New Jersey | Inheritance tax | No threshold; rates vary by heir relationship |
| New York | Estate tax | $6.94 million |
| Oregon | Estate tax | $1 million |
| Pennsylvania | Inheritance tax | No threshold; rates vary by heir relationship |
| Rhode Island | Estate tax | $1.63 million |
| Vermont | Estate tax | $2.75 million |
| Washington | Estate tax | $2.193 million |
| District of Columbia | Estate tax | $5.85 million |
The difference between estate tax and inheritance tax matters. Estate tax is paid by the estate before distribution. Inheritance tax is paid by the person who receives the money or property. In states with inheritance tax, the tax rate often depends on how closely related the heir is to the person who died — spouses and children usually pay less or nothing, while distant relatives or non-relatives pay more.
What triggers a federal estate tax return
If an estate is below the federal threshold, no federal estate tax return is required. However, the executor may still need to file one for other reasons — for instance, if the person who died had certain types of property or trusts, or if they owed income tax in their final year.
If the estate is above the threshold, the executor must file Form 706 (the federal estate tax return) with the IRS within nine months of the person's death. This important date can be extended, but the request must be made before the nine months are up.
State estate or inheritance tax returns follow different important date and rules depending on the state. An executor should check with the state tax authority or an estate attorney to know what is required.
How life insurance and retirement accounts affect estate tax
Life insurance proceeds are included in the estate's value for tax purposes, even though they pass directly to a named beneficiary and do not go through probate. The same is true for retirement accounts like IRAs and 401(k)s — their value counts toward the estate threshold.
This can push an estate over the threshold unexpectedly. A person with a $10 million house, $2 million in retirement accounts, and a $2 million life insurance policy has a $14 million estate, which exceeds the 2024 federal threshold by $390,000.
Some people use irrevocable life insurance trusts (ILITs) to remove life insurance from their taxable estate, but this requires planning before death and has its own rules and costs. An estate attorney can explain whether this makes sense for a particular situation.
What happens if the estate cannot pay the tax
If an estate owes tax but does not have enough liquid money to pay it, the executor may need to sell assets — real estate, investments, or business interests — to raise the cash. This can be costly and time-consuming.
In some cases, the IRS allows an executor to pay estate tax in installments over up to 14 years if the estate includes a family business or farm that makes up a large portion of the estate's value. This is called Section 6166 deferral. Interest accrues during the deferral period, and the rules are strict.
An estate attorney or tax professional can help determine whether installment payment is an option and whether selling assets or using other strategies makes more sense.
Planning to reduce or avoid estate tax
People with estates that may exceed the threshold during their lifetime can reduce the tax burden through several legal strategies. Gifting — giving money or property to heirs while alive — uses up the exemption gradually and removes future growth from the taxable estate. In 2024, you can give up to $18,000 per person per year without using any of your exemption.
Trusts, charitable donations, and spousal lifetime access trusts (SLATs) are other tools that can reduce estate tax, but each has specific rules and costs. These strategies require planning years in advance, not after someone has died.
An estate attorney or tax professional who specializes in estate planning can review a person's situation and explain which strategies might work. This is most useful for people whose estates are close to or above the threshold.
Frequently Asked Questions
Do I have to pay estate tax on my inheritance?
No. The estate pays the tax before your inheritance is distributed. You receive your share after the tax is paid. However, if you live in a state with inheritance tax and you are not a spouse or child, you may owe tax on what you receive.
What if the person who died lived in one state but owned property in another?
Federal estate tax applies to all property owned by the person, regardless of where it is located. State estate or inheritance tax depends on where the person lived when they died. If they owned real estate in another state, that state may also have claims on the estate.
Is the 2026 threshold change definitely happening?
The threshold is scheduled to drop in 2026 unless Congress passes new legislation. This is not certain, but it is the current law. Anyone with an estate near the current threshold should discuss planning options with an attorney before 2026.
Can I avoid estate tax by putting everything in my spouse's name?
Putting assets in a spouse's name alone does not avoid estate tax — it just delays it until the spouse dies. Both spouses' estates are added together for tax purposes if the surviving spouse does not remarry. A better approach depends on the total estate value and family situation.
What if my estate is below the threshold but I still owe state tax?
Yes. Several states have much lower thresholds than the federal government. Massachusetts and Oregon, for example, tax estates above $1 million. You can owe state tax even if you owe no federal tax.