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

The estate tax — sometimes called the "death tax" — is a one-time tax the federal government collects on an estate (the money, property, and possessions someone leaves behind) if that estate is large enough. It is separate from income tax and applies only to estates that exceed a certain threshold. The threshold changes every year and is currently quite high, which means most estates do not owe this tax at all.

The tax is paid by the estate itself before money and property are distributed to heirs. The executor of the estate — the person named to handle the estate — is responsible for filing the estate tax return with the IRS if the estate is large enough to require one. This is different from the income tax that heirs might owe on money they inherit that later produces income, like dividends or rental payments.

Key Takeaways

  • The federal estate tax applies only to estates worth more than a threshold amount, which was $13.61 million per person in 2024 and changes annually.
  • The tax rate on estates that do exceed the threshold is 40 percent of the value above the limit.
  • Most people do not owe estate tax because their estates fall below the threshold, but some states have their own estate or inheritance taxes with lower thresholds.
  • The executor of an estate must file Form 706 with the IRS if the estate exceeds the threshold, even if no tax is ultimately owed.
  • Married couples can combine their thresholds, effectively doubling the amount that can pass tax-free to heirs.

How the federal estate tax threshold works

The federal government sets an annual threshold — called the exemption amount — below which no estate tax is owed. In 2024, that threshold is $13.61 million per person. Any estate worth less than that amount owes zero federal estate tax, regardless of how it is distributed to heirs.

The threshold is adjusted each year for inflation, so it changes annually. This means an estate that does not owe tax in one year might owe tax in another year if the threshold drops — though the threshold has generally moved upward over time. Married couples can combine their thresholds, so a married couple could pass $27.22 million tax-free in 2024.

It is important to understand that the threshold is not a tax rate. An estate worth $13.61 million owes nothing. An estate worth $13.62 million owes tax only on the $0.01 million above the threshold, not on the entire amount.

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 above the limit. This is a much higher rate than most income tax brackets, which is why the exemption threshold is so important.

Here is a concrete example: if an estate is worth $15 million and the threshold is $13.61 million, the taxable amount is $1.39 million. The estate tax owed would be 40 percent of $1.39 million, or $556,000. The remaining $14.444 million passes to heirs tax-free.

The executor pays this tax from the estate's 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 to raise the money.

State estate and inheritance taxes

Seventeen states and the District of Columbia have their own estate or inheritance taxes, separate from the federal tax. Some states tax estates; others tax the heirs who receive money. These state taxes often have much lower thresholds than the federal exemption, so an estate might owe no federal tax but still owe state tax.

For example, Massachusetts has a state estate tax with a threshold of $1 million, far below the federal threshold. An estate worth $2 million would owe no federal estate tax but would owe Massachusetts state estate tax on the $1 million above that state's threshold.

The states with estate or inheritance taxes are Connecticut, Delaware, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington. The rules, thresholds, and rates vary significantly by state, so anyone with a large estate should research the rules in their state.

Who files the estate tax return and when

The executor of the estate is responsible for filing Form 706 (United States Estate Tax Return) with the IRS if the estate exceeds the federal threshold. This form must be filed within nine months of the person's death, though an extension can be requested.

Form 706 requires a detailed accounting of everything the estate owns: real estate, bank accounts, investments, vehicles, life insurance proceeds, and any other assets. The executor must also list any debts, funeral expenses, and other costs that reduce the taxable value of the estate.

Even if the estate does not owe tax — for example, because it falls just below the threshold or because the executor used certain tax-planning strategies — Form 706 may still need to be filed. Filing protects heirs by establishing the value of assets for tax purposes and starting the statute of limitations for the IRS to challenge the estate's valuation.

How life insurance and retirement accounts are treated

Life insurance proceeds and retirement account balances (like IRAs and 401(k)s) are included in the estate's value for estate tax purposes, even though they pass directly to named beneficiaries outside of the will. This surprises many people, because these assets do not go through probate.

For example, if someone has a $10 million life insurance policy and names their child as beneficiary, that $10 million is part of the estate's value for estate tax calculation. The child receives the $10 million outside of probate, but the estate's total value — used to determine whether estate tax is owed — includes it.

Retirement accounts have an additional layer: heirs who inherit them may owe income tax on withdrawals, separate from any estate tax. The rules for inherited retirement accounts changed significantly in 2023, so heirs should understand their withdrawal obligations.

Common strategies to reduce estate tax

People with large estates often use legal strategies to reduce the amount subject to estate tax. One common approach is the marital deduction, which allows a surviving spouse to inherit the entire estate tax-free, regardless of size. This defers the tax until the surviving spouse dies, but it does not eliminate it.

Another strategy is making annual gifts during life. The IRS allows each person to give up to a certain amount per year to any number of people without using any of their estate tax exemption. In 2024, that amount is $18,000 per recipient per year. A married couple can give $36,000 per recipient per year. Over time, these gifts reduce the size of the estate.

Trusts, charitable donations, and family limited partnerships are other tools used in estate planning. These strategies are complex and have specific rules, so anyone considering them should work with an estate planning attorney or tax professional.

Frequently Asked Questions

Do I owe estate tax if I inherit money from a family member?

No. Heirs do not owe federal income tax on inherited money or property. The estate itself pays the estate tax before distributing assets to heirs. However, if inherited assets later produce income — such as dividends, interest, or rent — heirs owe income tax on that income.

What happens if the estate does not have enough money to pay the estate tax?

The executor can sell estate assets to raise the cash needed to pay the tax. If the estate owns real estate or other illiquid assets, the executor may need to sell them. This is one reason people with large estates sometimes carry life insurance — the proceeds provide cash to pay estate taxes without forcing asset sales.

Can I reduce my estate tax by giving money to charity?

Yes. Charitable donations reduce the taxable value of an estate dollar-for-dollar. If an estate is worth $15 million and the owner donates $2 million to charity, the taxable estate is $13 million. Some people use charitable trusts to both reduce estate tax and receive income during their lifetime.

Does the estate tax threshold explore to each child separately or to the whole estate?

The threshold applies to the entire estate as a whole, not to each heir. An estate worth $15 million owes tax on the amount above the threshold, regardless of whether it is divided equally among five children or left entirely to one child.

What is the difference between estate tax and inheritance tax?

Estate tax is paid by the estate before distribution to heirs. Inheritance tax is paid by the heirs on what they receive. The federal government uses estate tax; some states use inheritance tax, estate tax, or both. The rules and rates differ significantly between the two.