The estate tax, often called the “death tax,” is a federal tax on the transfer of a deceased person’s assets before they pass to heirs. This tax only applies to estates valued above a substantial exemption threshold—$13.61 million per individual in 2024, according to the IRS. Most estates fall below this limit, meaning the tax affects less than 1% of Americans.
Understanding Federal Estate Tax
Federal estate tax is calculated on the “gross estate,” which includes all assets a person owned or had an interest in at death—such as real estate, investments, bank accounts, personal property, and business interests. From this, deductible expenses such as debts, funeral costs, legal fees, charitable donations, and the marital deduction reduce the taxable estate.
The marital deduction allows unlimited transfers to a surviving spouse who is a U.S. citizen without incurring estate tax, deferring taxation until the surviving spouse’s death. Only the value exceeding the exemption threshold is taxed at a top rate of 40%.
State Estate Taxes
Beyond federal rules, some states impose their own estate tax with lower exemption thresholds and different rates. This means even if an estate avoids federal estate tax, state estate taxes could still apply depending on the decedent’s residence.
How the Estate Tax Works: Example
If an estate is valued at $15 million, and deductions total $1.55 million, the taxable estate is $13.45 million. Because this is below the 2024 exemption of $13.61 million, no federal estate tax would be due. (Source: IRS Publication 950)
Who Pays the Estate Tax?
The estate tax liability is paid by the estate during probate before assets are distributed to beneficiaries. Heirs typically do not pay the estate tax out of their inheritance. An executor or estate administrator handles filing the estate tax return (Form 706) and paying any tax due.
Differences Between Estate Tax and Inheritance Tax
Unlike estate tax, inheritance tax is paid by individuals receiving assets, not the estate itself, and no federal inheritance tax exists. Inheritance tax rules vary by state and can depend on the beneficiary’s relationship to the deceased. For more detailed differences, see our Inheritance Tax article.
Estate Tax Planning Strategies
To legally reduce estate tax liability, common strategies include:
- Lifetime Gifting: Using the annual gift tax exclusion ($18,000 per recipient in 2024) and lifetime gift exemption to transfer wealth tax-free before death.
- Irrevocable Trusts: Removing assets from the taxable estate by placing them in trusts that the grantor no longer controls.
- Charitable Bequests: Making donations to qualified charities to reduce taxable estate value.
- Irrevocable Life Insurance Trusts (ILITs): Keeping life insurance proceeds outside the estate to benefit heirs tax-free.
- Professional Estate Planning: Consulting experienced attorneys and financial advisors to design customized plans that minimize estate tax and protect family assets.
Common Myths About Estate Tax
- Myth #1: “Estate tax affects most families.” In reality, only a small fraction of estates exceed the exemption threshold.
- Myth #2: “Estate tax is double taxation.” Though income contributing to the estate may have been taxed before, the estate tax is on the transfer, a separate taxable event.
- Myth #3: “Estate tax will force families to sell property.” While illiquid assets can create challenges, planning and IRS provisions often prevent forced sales.
Additional Resources
For more on estate, inheritance, and tax planning, explore Estate Tax Planning and Estate Planning.
Authoritative Source
For official information on estate tax rules, exemptions, and filing, consult the IRS website https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
This comprehensive overview equips readers to understand estate tax basics, recognize applicable rules and exemptions, and consider strategies for managing potential tax liabilities.
