The federal estate tax rate is 40% on estates above a threshold that changes yearly

The federal estate tax applies a flat rate of 40% to the value of an estate that exceeds the exemption threshold. For 2024, that threshold is $13.61 million per person; for 2025, it rises to $13.99 million. If your estate is smaller than that number, no federal estate tax is owed at all, regardless of how you leave it.

The 40% rate has been fixed since 2013. What changes is the exemption amount — the dollar figure below which estates pay nothing. Congress set the current exemption to expire at the end of 2025, after which it is scheduled to drop to roughly $7 million per person (adjusted for inflation) unless new legislation extends it.

State estate taxes and inheritance taxes operate separately from the federal tax and have their own rates and thresholds. Seventeen states plus Washington, D.C. impose an estate tax, inheritance tax, or both. State rates range from 3.6% to 20%, and state exemptions are often much lower than the federal threshold.

Key Takeaways

  • The federal estate tax rate is 40% on the amount of an estate that exceeds $13.99 million in 2025, and applies only to estates larger than that threshold.
  • The exemption threshold is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress extends the current law.
  • Married couples can combine their exemptions, effectively doubling the threshold if the first spouse's exemption is preserved through proper planning.
  • Seventeen states and Washington, D.C. impose their own estate or inheritance taxes with rates between 3.6% and 20%, independent of the federal tax.
  • Most people never pay federal estate tax because their estates fall below the exemption, but state taxes can affect smaller estates in high-tax states.

How the exemption threshold works and why it matters

The exemption is a dollar amount, not a percentage. If your estate is worth $10 million and the exemption is $13.99 million, you owe zero federal estate tax. If your estate is worth $15 million and the exemption is $13.99 million, you owe 40% on the $1.01 million above the threshold — that is $404,000.

The exemption applies once in your lifetime. You can give away up to that amount during your life, at death, or in any combination, without triggering federal gift or estate tax. Gifts above the exemption during your lifetime do not result in a tax bill when ready, but they reduce the exemption available at death. For example, if you give away $1 million during your life, your estate exemption shrinks by $1 million.

For married couples, each spouse has a separate exemption. If one spouse dies and the surviving spouse does not take steps to preserve the unused exemption, that exemption is lost. A technique called portability allows the surviving spouse to use the deceased spouse's unused exemption, effectively doubling the threshold. This requires filing a federal estate tax return within nine months of death, even if no tax is owed.

The scheduled exemption drop in 2026

Unless Congress acts, the exemption will fall from $13.99 million (2025) to roughly $7 million per person on January 1, 2026. This sunset was built into the 2017 tax law and has been in place for years. The exact 2026 amount will be announced by the IRS in October 2025 and will be adjusted for inflation from a 2010 baseline.

This drop matters most to people with estates between $7 million and $14 million. If your estate is currently below $7 million, the change will not affect you. If your estate is above $14 million, you are already planning for estate tax and should monitor whether Congress extends the higher exemption.

For estates in the middle range, the timing of death becomes significant. Someone who dies in December 2025 has a $13.99 million exemption; someone who dies in January 2026 has roughly $7 million. That difference can mean a tax bill of $2.8 million or more on the same estate size. People in this range often work with an estate planning attorney to understand their options before 2026.

State estate and inheritance taxes

Twelve states impose an estate tax (a tax on the estate itself): Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Washington, D.C. also has an estate tax. Five states impose an inheritance tax (a tax on what heirs receive): Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland has both.

State exemptions are much lower than the federal threshold. New York's exemption is $6.94 million in 2024. Connecticut's is $12.92 million. New Jersey's inheritance tax has no exemption for most heirs — even small inheritances can trigger a tax. Oregon's estate tax exemption is $1 million. If you live in or own property in a state with an estate or inheritance tax, your total tax burden can be substantially higher than the federal rate alone, even on estates below the federal exemption.

The state tax is calculated separately from the federal tax. You may owe both. Some states allow a credit for federal estate tax paid, which reduces the state bill, but this credit has limits and does not eliminate the state tax entirely.

Who typically pays estate tax and who does not

Fewer than 1 in 1,000 estates pay federal estate tax in any given year. Most people leave estates below the exemption and never face this tax. However, the exemption is temporary, and it is lower in some states, so the number of taxable estates can shift.

People most likely to face estate tax include business owners, real estate investors, and those with substantial investment portfolios. Life insurance proceeds are included in the taxable estate, which can push an otherwise modest estate over the threshold. Retirement accounts and certain trusts are also counted toward the exemption.

If you are married and your combined estate is close to or above the exemption, or if you live in a state with an estate tax, you should review your plan with an estate planning attorney. Even if you do not expect to owe tax, proper structuring can save your heirs money and avoid probate delays.

Planning strategies when estate tax is a concern

If your estate is large enough that federal or state estate tax is a real possibility, several strategies can reduce the tax burden. Irrevocable life insurance trusts (ILITs) remove life insurance proceeds from your taxable estate. Grantor retained annuity trusts (GRATs) allow you to transfer appreciating assets to heirs while paying little or no gift tax. Charitable remainder trusts let you donate to charity while receiving income during your lifetime.

Annual gifts to family members are not subject to gift tax up to a limit that changes yearly — $18,000 per recipient in 2024 and $19,000 in 2025. These gifts do not reduce your lifetime exemption if they stay within the annual limit. Spouses can combine their annual gifts, effectively doubling the amount.

Timing matters, especially with the 2026 exemption drop. Some people choose to make large gifts before 2026 to use the higher exemption while it lasts. Others restructure their estates to take advantage of trusts or other tools. These decisions depend on your specific situation, your state of residence, and your family goals. An estate planning attorney can model different scenarios and recommend the approach that fits your circumstances.

How to learn about your estate might be taxable

Start by listing your assets: real estate, bank and investment accounts, retirement accounts, life insurance, business interests, and personal property of significant value. Add them up. If the total is below the exemption for your state and the federal level, you likely will not owe estate tax.

If the total is close to or above the exemption, or if you live in a state with an estate tax, consult an estate planning attorney in your state. They can review your specific situation, account for state law differences, and recommend planning strategies. Some attorneys offer a flat fee for an initial review, which can be much cheaper than guessing and paying tax you could have avoided.

If you are unsure about the value of your assets — especially a business, real estate, or art collection — you may need a professional appraisal. The IRS values estates at fair market value as of the date of death, not what you paid for them. An appraisal done during your lifetime can help you and your heirs understand the true estate size.

Frequently Asked Questions

Does the 40% rate explore to my whole estate or just the amount over the exemption?

Only the amount over the exemption is taxed at 40%. If your estate is $15 million and the exemption is $13.99 million, only $1.01 million is subject to tax. You do not pay 40% on the full $15 million.

If I give money to my kids now, do I have to pay gift tax?

Gifts up to $19,000 per recipient per year (in 2025) are not subject to gift tax and do not reduce your lifetime exemption. Larger gifts do not trigger an when ready tax bill but do reduce your exemption available at death. Consult a tax professional if you are planning large gifts.

What happens to my spouse's unused exemption if I die first?

Without portability planning, it is lost. Your executor must file a federal estate tax return within nine months of your death to preserve it for your surviving spouse. If you do not file, that exemption cannot be used later. This is why married couples should review their plans with an attorney.

Do I have to pay federal estate tax if I live in a state with its own estate tax?

Yes, they are separate taxes. You may owe both. Some states allow a credit for federal tax paid, but this does not eliminate the state tax. Your total tax burden depends on both the federal exemption and your state's rules.

Is life insurance included in my taxable estate?

Yes, unless it is owned by an irrevocable life insurance trust or another entity. Life insurance proceeds are added to your estate value for tax purposes. If your estate is large, life insurance can push you over the exemption threshold and trigger a tax bill.