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

When you die, the Internal Revenue Service (IRS) looks at the combined value of your bank accounts, real estate, investments, vehicles, jewelry, and other property. If that total exceeds a certain threshold — called the exemption amount — your estate owes federal tax on the excess. The tax is paid from the estate's assets before anything goes to your heirs.

The exemption amount changes every year based on inflation. For 2024, the federal exemption is $13.61 million per person. This means if your estate is worth $13.61 million or less, no federal estate tax is owed at all. If it exceeds that amount, tax is owed only on the portion above the threshold, and the rate is 40 percent.

Estate tax is separate from income tax, property tax, and inheritance tax. It applies only to estates large enough to cross the exemption threshold, which means most people never pay it. However, some states also impose their own estate taxes with lower exemption amounts, so a person might owe state estate tax even if they owe nothing to the federal government.

Key Takeaways

  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, and the tax rate on the excess is 40 percent.
  • The exemption amount increases each year with inflation, so the threshold that triggers estate tax changes annually.
  • Estate tax is paid from the estate's assets before heirs receive their inheritance, not by the heirs themselves.
  • Sixteen states and the District of Columbia also impose their own estate taxes, often with exemption amounts between $1 million and $6 million.
  • The federal exemption is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.

How the exemption amount works

The exemption is the dollar amount your estate can be worth without triggering any federal estate tax. Think of it as a shield: everything up to the exemption is protected, and tax applies only to the amount above it.

If your estate is worth $15 million and the exemption is $13.61 million, only $1.39 million is subject to the 40 percent tax. That means the estate owes $556,000 in federal estate tax. The remaining $14.444 million goes to your heirs (after that tax is paid).

The exemption amount is adjusted for inflation every January. The IRS publishes the new figure early in the year, so you can look it up for the current year. Because the exemption is so high, fewer than 1 in 1,000 estates owe federal estate tax in any given year.

The sunset provision and what changes in 2026

The current high exemption amount — $13.61 million — exists because of a law passed in 2017. That law included a sunset provision, meaning the exemption is scheduled to drop automatically on January 1, 2026, unless Congress votes to extend it.

When the sunset occurs, the exemption is set to fall to approximately $7 million per person (adjusted for inflation from a 2011 baseline). This would roughly double the number of estates subject to federal tax, though the total would still be a small percentage of all estates.

Congress can change this at any time by passing new legislation. The exemption could be extended at its current level, lowered further, or eliminated entirely. Because the law is uncertain after 2025, people with estates in the $7 million to $13.61 million range sometimes work with tax professionals to plan ahead.

State estate taxes and how they differ

Sixteen states plus Washington, D.C., impose their own estate taxes. These are separate from the federal tax, and a large estate may owe both. State exemption amounts vary widely: some states use exemptions as low as $1 million, while others set them at $5.9 million or higher.

New York, for example, has a state exemption of $6.94 million in 2024. Massachusetts has $1 million. If you live in or own property in a state with an estate tax, your estate may owe state tax even if it owes nothing to the federal government. The state tax rate also varies, typically ranging from 3.6 percent to 16 percent on the taxable amount.

Some states call their tax an "estate tax" and others call it an "inheritance tax," but they work the same way: they explore to the total value of the estate, not to what individual heirs receive. A few states impose both an estate tax and an inheritance tax, which is rare but does happen.

What counts as part of your estate

Your estate includes almost everything you own at the time of death: your home, bank accounts, retirement accounts, investment accounts, vehicles, life insurance proceeds, and personal property like jewelry or art. It also includes the value of any business you own, even if it is a small family business.

Some assets pass outside of your estate and are not subject to estate tax. These include assets held in a revocable living trust, assets with a named beneficiary (like life insurance or retirement accounts), and property held as joint tenants with rights of survivorship. These assets pass directly to the named beneficiary or co-owner and bypass the probate process entirely.

Gifts you made during your lifetime may also count toward your estate for tax purposes, but only if they exceed the annual gift tax exclusion amount (which is $18,000 per recipient in 2024). Gifts within that limit do not count against your exemption.

Who pays the estate tax and when

The executor or personal representative of your estate — the person named in your will to manage your affairs after death — is responsible for paying the estate tax. They use money from the estate itself to pay the bill, which reduces what is left for heirs.

The executor must file Form 706 (the federal estate tax return) with the IRS if the estate exceeds the exemption amount. The return is due nine months after the date of death, though an extension can be requested. State estate tax returns, if required, have their own important date that vary by state.

If the estate does not have enough liquid assets (cash or easily sold investments) to pay the tax, the executor may need to sell property or other assets to raise the money. This is one reason people with large estates sometimes plan ahead: they can arrange their finances so the estate has enough cash on hand to pay the tax without forcing a fire sale of assets.

Planning strategies for large estates

People whose estates are likely to exceed the exemption amount sometimes use legal strategies to reduce the tax owed. These include setting up trusts, making gifts during their lifetime (within the annual exclusion), establishing charitable giving plans, or using life insurance in specific ways.

A bypass trust (also called a credit shelter trust) allows a married couple to each use their own exemption, effectively doubling the amount that can pass tax-free. A charitable remainder trust lets you donate to charity while still receiving income during your lifetime, and the donated amount does not count toward your taxable estate.

These strategies are complex and depend on your specific situation, your state of residence, and your family circumstances. They also depend on what the exemption amount will be in the future, which is uncertain. A tax professional or estate planning attorney can review your situation and explain which strategies, if any, might reduce your estate's tax burden.

Frequently Asked Questions

Do I owe estate tax if I live in a state without an estate tax?

No state estate tax applies, but you may still owe federal estate tax if your estate exceeds $13.61 million in 2024. Federal estate tax applies regardless of where you live. However, if you own property in a state that does have an estate tax, that state may tax the portion of your estate located there.

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

Yes, within limits. You can give up to $18,000 per recipient per year in 2024 without it counting against your exemption or triggering a gift tax. Larger gifts count against your lifetime exemption amount, reducing what you can pass tax-free at death. Gifts to spouses and certain charities are unlimited.

What happens to my estate tax exemption if I am married?

Each spouse has their own exemption amount. A married couple can combine their exemptions through portability, which allows the surviving spouse to use any unused exemption from the deceased spouse. This requires filing a federal estate tax return even if no tax is owed, to preserve the unused amount.

Is life insurance included in my taxable estate?

Yes, if you own the policy. Life insurance proceeds are included in your estate for tax purposes. However, if someone else owns the policy (like an adult child or a trust), the proceeds are not part of your taxable estate. This is one reason people sometimes transfer ownership of policies as part of estate planning.

What if my estate is worth $13.5 million — do I owe any estate tax?

No. Your estate is below the $13.61 million exemption for 2024, so no federal estate tax is owed. However, you should still check whether your state imposes an estate tax, because state exemptions are usually much lower than the federal amount.