Quick overview

The federal estate tax is a tax on the transfer of a deceased person’s estate to heirs and beneficiaries. It applies only when the estate’s taxable value exceeds the federal exclusion (often called the exemption). The law provides deductions and credits — for example, transfers to a surviving spouse and charitable gifts — which reduce the taxable estate. Federal estate tax rates are graduated and can reach 40% on amounts above the exemption after deductions and credits IRS — Estate and Gift Taxes.

How the exemption and rates work (practical notes)

  • Exemption (basic exclusion amount): The federal exclusion is indexed for inflation and has increased in recent years. For context, it was $12.92 million per individual in 2023 and rose for subsequent years; because the amount changes annually, always confirm the current figure on the IRS site. Absent new legislation, the exclusion amount is scheduled to change after tax-law expirations, which makes periodic review necessary IRS — Estate and Gift Taxes.
  • Rates: Estates that are taxable after deductions face graduated tax rates that currently top out at 40%.
  • Deductible items: Funeral costs, final medical expenses, outstanding debts, qualifying marital and charitable deductions, and certain estate administration expenses reduce the taxable estate. Qualified lifetime gifts reduce your estate only if they exceed the annual gift-tax exclusion or otherwise consume part of your lifetime exemption.
  • Filing requirement: If the gross estate plus certain adjusted items meets the filing threshold, the executor must file IRS Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) generally within nine months of death; a six-month extension is available upon request [IRS — Form 706 Instructions].

Practical steps to estimate potential estate tax exposure

  1. Make an inventory: List assets subject to estate tax (real estate, brokerage accounts, business interests, retirement accounts, life insurance if payable to the estate, and certain transferred property).
  2. Subtract liabilities and allowable deductions: Mortgage/debt, funeral costs, administration expenses, and qualified charitable or marital transfers.
  3. Apply the current basic exclusion amount (check IRS). If the result is positive, apply the graduated rates to estimate tax.
  4. Consider portability (if applicable): A surviving spouse can elect portability to use an unused portion of a deceased spouse’s unused exclusion. Portability requires timely filing of Form 706 even if no tax is due; see the FinHelp guide on portability for details.

Practical resources: see the IRS estate tax overview and Form 706 instructions for exact filing thresholds and definitions IRS — Estate and Gift Taxes.

Common planning strategies (what I recommend in practice)

  • Use annual gifts: Regular, lifetime gifts reduce the size of a taxable estate. Make full use of the annual gift-tax exclusion (amounts increase periodically). Keep records and consult a tax advisor to track lifetime exemption use.
  • Leverage irrevocable trusts: Certain irrevocable trusts (e.g., irrevocable life insurance trusts, grantor trusts in specific structures) remove assets from the estate if properly structured and funded. Work with an estate attorney — drafting and funding issues matter.
  • Charitable planning: Charitable remainder trusts, donor-advised funds, and direct bequests can lower estate tax while fulfilling philanthropic goals.
  • Portability election: Survivors should consider portability to use a deceased spouse’s unused exclusion. Filing Form 706 on time is necessary to preserve portability in many cases; review timing and exceptions with counsel. For more on this topic see FinHelp’s article on portability and gifting strategies: “Minimizing Estate Taxes with Portability and Gifting”.
  • Business succession and discounts: For closely held business interests, valuation discounts, family limited partnerships (with caution), and buy-sell agreements can move value out of the taxable estate in a tax-efficient manner. Each structure has legal and audit risk and requires valuation support; see FinHelp’s guidance on valuing closely held businesses.

Internal resources:

State estate and inheritance taxes — don’t overlook them

Several states impose estate or inheritance taxes with lower thresholds than the federal exemption. A family that’s safe from federal estate tax can still owe state tax depending on residency or where property is located. Practical steps:

  • Check state rules where you live and where real property is held.
  • Coordinate state and federal planning to avoid surprises (e.g., liquidity planning if estate taxes are due but assets are illiquid).
    FinHelp’s article “How State Estate Taxes Differ from Federal Estate Taxes” explains common state triggers and planning responses.

Common mistakes I see and how to avoid them

  • Assuming you’re safe: People often miss includible assets (e.g., certain jointly held property, retained interests, or transfer-on-death designations that may increase estate value).
  • Missing portability deadlines: If an executor fails to file Form 706 timely, the surviving spouse may lose the ability to claim portability of the unused exclusion.
  • Skipping valuation support: Under- or over-valuing closely held business interests, real estate, or unique assets invites IRS challenges and can affect gifting and discount strategies.
  • Treating trusts as set-and-forget: Trusts must be properly funded and periodically reviewed to retain intended tax benefits.

Real-world examples (illustrative)

1) Married couple planning for portability: Spouses with combined assets near the exclusion amount can combine planning tools — lifetime gifts, joint trusts, and portability elections — to preserve the full estate exclusion between them. Portability can be especially valuable for couples who did not engage in lifetime gifting.

2) Business owner with concentrated value: A small-business owner with a high business valuation can transfer fractional interests to family members using annual exclusions and valuation discounts, and establish buy-sell funding with life insurance to provide liquidity for estate taxes.

These are illustrative examples; the optimal combination depends on asset mix, family goals, and tolerance for complexity.

Executor responsibilities and filing

  • Inventory and value assets as of date of death (or alternate valuation date where permitted).
  • Determine whether Form 706 must be filed (filing threshold changes with the basic exclusion level; check current IRS guidance).
  • Claim deductions and credits (marital deduction, charitable deduction, applicable credit for estate tax).
  • If tax is due, compute payments and consider payment options; life insurance held in the decedent’s estate is often used to provide liquidity.

See FinHelp’s practical article on funding estate taxes when liquidity is tight: “Funding Estate Taxes: Practical Options When Liquidity Is Tight” for strategies executors commonly use.

Link: Funding Estate Taxes: Practical Options When Liquidity Is Tight — https://finhelp.io/glossary/funding-estate-taxes-practical-options-when-liquidity-is-tight/

Frequently asked practical questions

  • Who pays the estate tax? The estate pays the tax out of estate assets before distribution to heirs. Executors are responsible for filing and payment.
  • Does life insurance get taxed? Life insurance proceeds payable directly to a beneficiary typically are not included in the beneficiary’s income, but if the policy is owned by the decedent or payable to the estate, the proceeds may be includible in the estate for estate-tax purposes.
  • Can I reduce estate tax with lifetime giving? Yes — gifts that remove value from your taxable estate (and that do not consume the annual exclusion only) can reduce future estate tax exposure, but gifts that exceed annual exclusions generally use part of your lifetime exemption and must be tracked.

Next steps and checklist

  • Confirm current federal basic exclusion amount on the IRS website.
  • Inventory assets and identify includible items.
  • Meet with an estate attorney and a CPA to evaluate trusts, gifting, and portability options.
  • Review state estate/inheritance tax exposure and plan accordingly.
  • Keep records of lifetime gifts and trust funding.

Sources and further reading

Professional disclaimer: This article is educational and general in nature, not tax or legal advice. For guidance tailored to your situation, consult a qualified estate planning attorney or CPA. Tax law changes can materially affect planning outcomes; verify current figures and rules before acting.