Estate tax is a federal tax on the total value of money and property someone leaves behind when they die

The federal government taxes estates — the sum of everything a person owned at death — only when that estate exceeds a certain dollar amount. That threshold changes every year and is currently very high, which means most estates do not owe federal estate tax. States set their own thresholds, which are often much lower, so a state estate tax bill is more common than a federal one.

Estate tax is separate from income tax. It is paid from the estate's assets before money and property pass to heirs. The executor — the person named in the will to manage the estate — is responsible for figuring out whether tax is owed and filing the necessary forms with the IRS and state tax authority.

Understanding whether an estate will owe tax depends on three things: the total value of the estate, the state where the person lived, and the year of death. This guide explains how each one matters.

Key Takeaways

  • Federal estate tax only applies to estates worth more than a threshold amount set by Congress, which is $13.61 million for deaths in 2024 and will drop to roughly $7 million in 2026 unless Congress changes the law.
  • State estate taxes have lower thresholds than federal tax and vary by state — some states have no estate tax at all, while others tax estates worth $1 million or more.
  • The executor of an estate must file Form 706 with the IRS if the estate exceeds the federal threshold, and may need to file state forms depending on where the person lived.
  • Estate tax is paid from the estate's assets before heirs receive their inheritance, which can reduce what beneficiaries actually get.
  • Life insurance proceeds, retirement accounts with named beneficiaries, and property held in certain trusts may not count toward the estate's taxable value.

Federal estate tax thresholds and rates

The federal estate tax threshold — called the exemption amount — is the dollar value below which no federal estate tax is owed. For 2024, that amount is $13.61 million per person. An estate worth $13.6 million owes nothing. An estate worth $14 million owes tax only on the $400,000 above the threshold.

The tax rate on the amount over the threshold is a flat 40 percent. So in that $14 million example, the estate would owe $160,000 in federal tax.

The exemption amount is scheduled to drop significantly after 2025. Unless Congress passes new legislation, the exemption will fall to approximately $7 million per person starting in 2026. This means far more estates will owe federal tax beginning that year. Married couples can combine their exemptions, so a married couple in 2024 could have a combined exemption of $27.22 million.

State estate taxes and inheritance taxes

Seventeen states and Washington, D.C. currently have an estate tax, separate from the federal tax. State exemption amounts are much lower than the federal threshold. Massachusetts, for example, taxes estates worth $1 million or more. Oregon taxes estates worth $1 million or more. New York taxes estates worth $6.94 million or more in 2024.

Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have an inheritance tax instead of an estate tax. An inheritance tax is paid by the person who receives the inheritance, not by the estate itself. The tax rate and what is taxed depend on the relationship between the deceased and the heir. A spouse or child often pays nothing, while a distant relative or unrelated person may pay a higher rate.

If you lived in a state with an estate tax or inheritance tax when you died, your estate may owe state tax even if it does not owe federal tax. The executor needs to know the rules in the state where the person lived at death.

What counts toward the taxable estate

The taxable estate includes the fair market value of nearly everything the person owned: real estate, bank accounts, investments, vehicles, jewelry, artwork, and business interests. It also includes life insurance proceeds if the deceased owned the policy or had the power to change who receives the money.

Some assets do not count toward the taxable estate. Retirement accounts like IRAs and 401(k)s with a named beneficiary pass directly to that beneficiary outside the estate. The same is true for life insurance if it is owned by a trust or if the beneficiary is named as the owner. Property held in a revocable living trust is included in the taxable estate, but property in an irrevocable trust may not be, depending on how the trust is written.

Debts owed by the deceased — mortgages, credit cards, medical bills — reduce the taxable estate value. So does money left to a surviving spouse or to a may have access to charity.

How the executor files estate tax forms

If the estate exceeds the federal exemption amount for the year of death, the executor must file Form 706 (United States Estate Tax Return) with the IRS. This form is due nine months after the date of death, though an extension can be requested.

Form 706 requires a detailed list of every asset, its fair market value on the date of death, and how it is titled. The executor will also need to report any gifts the deceased made during life that count toward the lifetime exemption. The form is complex and typically requires help from an estate attorney or tax professional.

If the state has an estate tax or inheritance tax, the executor must also file the appropriate state form. State important date vary but are often the same nine-month window as the federal important date. Some states require the state return to be filed before or at the same time as the federal return.

The difference between estate tax and probate

Estate tax and probate are not the same thing. Probate is the court process that transfers property from the deceased to heirs when there is no will or when property is titled in the deceased's name alone. Probate can take months or years and involves court fees and attorney fees.

Estate tax is a tax bill that may or may not be owed, depending on the value of the estate. An estate can go through probate without owing any tax, or it can owe tax without going through probate if assets are held in a trust or have named beneficiaries.

Some people use trusts specifically to avoid probate, but this does not automatically avoid estate tax. The assets in the trust still count toward the taxable estate unless the trust is structured in a specific way.

Planning to reduce estate tax

People with estates that may exceed the exemption amount sometimes work with an attorney to reduce what will be taxed. Common strategies include giving money or property to heirs during life (within annual gift tax limits), setting up certain types of trusts, or leaving money to charity.

Because the federal exemption is scheduled to drop in 2026, some people have made large gifts to family members in 2024 and 2025 to use their current exemption before it shrinks. This is a complex decision that depends on personal circumstances and should be discussed with an estate attorney or tax professional.

State estate tax planning is also important. Someone who moves to a state with no estate tax may reduce what their heirs will owe, but the move must be genuine and documented — straightforward claiming residency in another state without actually moving there does not work.

Frequently Asked Questions

Does everyone have to file Form 706?

No. Form 706 is only required if the estate exceeds the federal exemption amount for the year of death. In 2024, that is $13.61 million. Most estates are below that threshold and owe no federal estate tax. However, some states require a state estate tax return even for smaller estates, so check your state's rules.

Can heirs be stuck paying the estate tax bill?

No. Estate tax is paid from the estate's assets before heirs receive their inheritance. If the estate does not have enough cash to pay the tax, the executor may need to sell assets. This reduces what heirs actually receive, but heirs are not personally liable for the tax bill.

What happens if the executor does not file Form 706 when it is required?

The IRS can assess penalties and interest on the unpaid tax. The longer the delay, the larger the penalty. If the estate is large enough to owe significant tax, the cost of not filing can be substantial. An estate attorney or tax professional can help determine whether filing is required.

Does a life insurance payout count as part of the estate?

It depends on who owns the policy. If the deceased owned the policy or had the power to change the beneficiary, the payout counts toward the taxable estate. If someone else owns the policy or if the policy is owned by an irrevocable trust, the payout usually does not count. This is a common reason people use trusts to own life insurance.

What is the difference between the federal exemption and a state exemption?

The federal exemption is the threshold for owing federal estate tax to the IRS. State exemptions are the thresholds for owing state estate tax. They are separate calculations. An estate might be below the federal threshold but above the state threshold, meaning it owes state tax but no federal tax.