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

When you die, the IRS looks at the combined value of your bank accounts, real estate, investments, retirement accounts, life insurance, and other property. If that total exceeds a threshold set by federal law, your estate owes a tax before your heirs receive their inheritance. This is separate from income tax — it is a one-time tax on the transfer of wealth itself, not on income earned during your lifetime.

The federal estate tax threshold changes every year because it is tied to inflation. For 2024, an estate must exceed $13.61 million for federal estate tax to explore. This means most people's estates never owe this tax. However, some states also impose their own estate taxes with much lower thresholds, sometimes as low as $1 million or $2 million, so a state tax can explore even when the federal tax does not.

The tax is paid from the estate's assets before anything is distributed to heirs. If an estate owes $500,000 in tax but only has $2 million in total assets, the heirs receive $1.5 million instead of $2 million. The executor — the person named in your will to manage your estate — is responsible for calculating and paying the tax to the IRS.

Key Takeaways

  • Federal estate tax applies only to estates worth more than $13.61 million in 2024, but this threshold changes yearly and some states have much lower limits.
  • The tax is paid from the estate's assets before heirs receive their inheritance, which means a large tax bill can reduce what beneficiaries actually get.
  • The executor files Form 706 (the federal estate tax return) with the IRS within nine months of death, even if no tax is owed.
  • Married couples can combine their thresholds through portability, potentially doubling the amount that passes tax-free to heirs.
  • Life insurance, retirement accounts, and property held in certain trusts can be structured to avoid or reduce estate tax exposure.

Who pays the estate tax and when

The estate itself pays the tax, not the individual heirs. The executor withdraws money from the estate's bank accounts or sells assets to cover the bill. This happens before the will is probated and before heirs receive their distributions. If the estate does not have enough liquid cash, the executor may need to sell real estate, stocks, or other property to raise the money.

The important date to pay is nine months after the person's death. The executor files Form 706 (United States Estate Tax Return) with the IRS, which reports the total value of the estate and calculates the tax owed. If the estate is small enough that no tax is due, Form 706 still must be filed in some cases — the rules depend on the total estate value and whether certain assets are present.

If the estate cannot pay the full tax by the important date, the executor can request an extension, but interest and penalties accrue on any unpaid balance. This is one reason people with large estates sometimes use life insurance or trusts to plan ahead — to make sure there is cash available when the bill comes due.

How the tax is calculated

The IRS starts by adding up the gross estate — the fair market value of everything the person owned at death. This includes obvious assets like a house and bank accounts, but also less obvious ones: the death benefit from a life insurance policy, the value of a business, retirement accounts like IRAs and 401(k)s, and even the value of certain gifts made within three years of death.

From the gross estate, the executor subtracts deductions. The largest deduction is usually the marital deduction — if everything goes to a surviving spouse, no federal tax is owed at all. Other deductions include debts the person owed (mortgages, credit cards), funeral expenses, and costs of administering the estate. Charitable donations made through the will also reduce the taxable estate.

What remains is the taxable estate. The executor then applies the federal tax rate, which is 40 percent on the amount above the threshold. For example, if the taxable estate is $14.61 million and the 2024 threshold is $13.61 million, the tax is 40 percent of $1 million, or $400,000. Some states add their own tax on top of this.

The difference between federal and state estate taxes

Federal estate tax applies nationwide and uses the $13.61 million threshold (in 2024). State estate taxes are separate and vary widely. Some states have no estate tax at all. Others impose an estate tax with thresholds ranging from $1 million to $6 million. A few states use the same threshold as the federal government.

If you live in a state with an estate tax, your estate may owe state tax even if it does not owe federal tax. For example, Massachusetts has a state estate tax with a $1 million threshold. An estate worth $2 million would owe no federal tax but would owe Massachusetts state tax on the amount above $1 million. The state tax rate varies by state but is typically lower than the federal 40 percent rate.

Some states also impose an inheritance tax, which is different from an estate tax. An inheritance tax is paid by the heirs based on what they receive and their relationship to the deceased. Only a handful of states use inheritance tax, and the rates and thresholds vary. A few states have both an estate tax and an inheritance tax.

How married couples can reduce or avoid estate tax

The marital deduction is the most powerful estate tax tool for married couples. It allows one spouse to leave an unlimited amount to the other spouse with no federal estate tax. This means if you are married and leave everything to your spouse, your estate pays zero federal tax, no matter how large it is.

However, this only delays the tax. When the surviving spouse dies, their estate is taxed on everything they own, including what they inherited. To take full advantage of both spouses' thresholds, couples often use a strategy called portability. When the first spouse dies, the executor files Form 706 even if no tax is owed, which allows the surviving spouse to use the deceased spouse's unused threshold. This effectively doubles the amount that can pass to heirs tax-free.

For example, if one spouse dies in 2024 with a $13.61 million threshold and leaves everything to the surviving spouse, the surviving spouse can later pass $27.22 million to their heirs tax-free (their own $13.61 million threshold plus the deceased spouse's $13.61 million). Without portability, only the surviving spouse's threshold would explore.

Common strategies to reduce estate tax exposure

People with large estates often use irrevocable life insurance trusts (ILITs) to keep life insurance proceeds out of the taxable estate. When structured correctly, the death benefit from a life insurance policy is not counted as part of the estate, even though it provides cash to pay estate taxes or fund inheritances. This requires setting up the trust before buying the policy or transferring an existing policy into the trust.

Another approach is annual gifting. The IRS allows you to give up to a certain amount per person per year (the limit changes yearly) without using any of your lifetime threshold. A married couple can give twice that amount. Over time, these gifts reduce the size of the taxable estate. Gifts must be made during your lifetime; they do not count as bequests in your will.

Some people use grantor retained annuity trusts (GRATs) or may have access to personal residence trusts (QPRTs) to transfer appreciating assets at a reduced tax value. These are complex strategies that require professional help to set up correctly. A charitable remainder trust can also reduce estate taxes while providing income to you during your lifetime and leaving money to charity.

What happens if an estate does not pay the tax

If the executor does not pay the estate tax by the important date, the IRS assesses penalties and interest. The interest rate is set quarterly and compounds daily. Penalties can be substantial — typically 25 percent of the unpaid tax if the failure is due to negligence, or 75 percent if it is considered fraud.

The IRS can also place a lien on the estate's assets, which prevents the executor from distributing anything to heirs until the tax is paid. In some cases, the IRS may pursue the executor personally if they knowingly failed to pay a tax the estate owed. This is one reason executors often hire an estate tax attorney or accountant to review the situation before filing.

If an estate genuinely cannot pay the full amount, the executor can request an installment agreement with the IRS. The estate can pay the tax over time, though interest continues to accrue. This option is available only if the estate qualifies under IRS rules, which typically require that the estate tax be a significant portion of the estate's value.

Frequently Asked Questions

Does my estate have to file Form 706 if no tax is owed?

Not always, but often yes. If the gross estate exceeds a certain threshold (which varies by year and situation), Form 706 must be filed even if no tax is owed. Filing is also required if you want to use portability to preserve your spouse's unused threshold. An estate tax professional can determine whether filing is required in your situation.

Can I reduce my estate tax by giving money to my children before I die?

Yes. Annual gifts up to the IRS limit per person per year do not count against your lifetime threshold. A married couple can give twice that amount each year. These gifts reduce the size of your taxable estate. However, gifts made within three years of death may be pulled back into the estate for tax purposes in some situations.

What is the difference between estate tax and inheritance tax?

Estate tax is paid by the estate before heirs receive anything. Inheritance tax is paid by the heirs based on what they receive and their relationship to the deceased. Only a few states use inheritance tax. Most states that tax estates use estate tax, and many states use neither.

If I leave everything to my spouse, do I owe estate tax?

No federal estate tax is owed because of the marital deduction. However, your spouse's estate will be taxed on everything they own when they die, including what they inherited from you. Using portability when the first spouse dies allows the surviving spouse to use both thresholds, potentially doubling the tax-free amount.

How often does the federal estate tax threshold change?

The threshold is adjusted annually for inflation. It was $13.61 million per person in 2024. The exact amount changes each January based on the previous year's inflation rate. Some states also adjust their thresholds yearly, while others keep them fixed. Check the current year's threshold before planning your estate.