The executor pays the estate tax bill, but the money comes from the estate itself before heirs receive their inheritance

When someone dies and leaves behind a taxable estate, the executor (the person named in the will to manage the estate) is responsible for calculating and paying the estate tax to the IRS. The executor files Form 706, the estate tax return, and writes the check from the estate's bank account or by selling assets. The heirs do not pay the tax directly — they receive what is left after taxes, debts, and expenses are paid.

This matters because it changes how much each heir actually receives. If an estate is worth $15 million and the federal estate tax is $4 million, the heirs split the remaining $11 million, not the full $15 million. The tax reduces the inheritance before distribution.

In most cases, only estates larger than the federal exemption threshold owe federal estate tax at all. For 2024, that threshold is $13.61 million per person (it changes yearly). Estates below that amount owe nothing to the IRS, though some states have their own lower thresholds and their own estate or inheritance taxes.

Key Takeaways

  • The executor pays the federal estate tax bill using money from the estate, reducing what heirs inherit.
  • Only estates larger than the federal exemption threshold (currently $13.61 million per person in 2024) owe federal estate tax.
  • Some states impose their own estate or inheritance taxes on smaller estates, so a state tax bill can exist even when no federal tax is owed.
  • The executor files Form 706 with the IRS and must pay the tax within nine months of death, though extensions are available.
  • If the estate does not have enough liquid cash, the executor may need to sell assets or borrow money to pay the tax bill.

How the executor becomes responsible for the tax

The executor's job is to settle the estate — pay debts, file final tax returns, and distribute what remains to the heirs. Estate tax is treated as a debt of the estate, just like funeral costs or outstanding credit card balances. The executor must pay it before distributing any inheritance.

If the executor fails to pay the estate tax, the IRS can pursue the heirs personally for the unpaid amount, plus penalties and interest. This is why executors often hire an estate attorney or accountant to help calculate the tax correctly and file Form 706 on time. The cost of that professional help comes from the estate as well.

The difference between federal and state estate taxes

Federal estate tax applies only to estates larger than $13.61 million (in 2024). But 12 states and Washington, D.C. have their own estate taxes, and most of them use much lower thresholds. Massachusetts, for example, taxes estates over $1 million. Oregon taxes estates over $1 million. New York taxes estates over $6.94 million (as of 2024, but this amount changes yearly).

Some states also have inheritance taxes, which work differently: they tax the heirs based on what they receive and their relationship to the deceased. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. A child might owe tax, but a spouse might not, depending on the state's rules.

An estate can owe state tax even if it owes no federal tax. A $2 million estate in Massachusetts owes no federal estate tax but does owe Massachusetts state estate tax. The executor must file both the federal Form 706 and the state return, and pay both bills from the estate.

What happens if the estate does not have enough cash

If the estate is mostly real estate, artwork, or other non-liquid assets, the executor may not have enough cash in the bank to pay the tax bill. In that case, the executor can sell assets from the estate to raise the money. This might mean selling the family home, a business, or investments.

Alternatively, the executor can request a deferral from the IRS under Section 6163 if the estate includes a closely held business or farm. This allows the executor to pay the tax in installments over up to 14 years, though interest accrues. The executor can also borrow money against the estate's assets to pay the tax upfront.

The choice between selling assets, deferring payment, or borrowing affects which heirs benefit and which lose out. If the executor sells a rental property to pay tax, the heirs lose that income-producing asset. These decisions should be made with legal and tax information.

How heirs can end up paying indirectly

Although heirs do not write the estate tax check, they pay it indirectly by receiving a smaller inheritance. If an estate is worth $20 million and owes $5 million in federal estate tax, each heir receives less than they would have without the tax.

Some heirs may also owe income tax on inherited assets. If the estate includes retirement accounts like IRAs or 401(k)s, the heirs who inherit those accounts must pay income tax when they withdraw the money (with some exceptions for surviving spouses). This is separate from estate tax and is the heir's responsibility, not the executor's.

In rare cases, if the executor mishandles the estate or fails to pay taxes, heirs can be held personally liable. This is why it is important for heirs to understand what the executor is doing and to ask questions if the inheritance seems unusually small.

The timeline for paying estate tax

The executor must file Form 706 and pay any federal estate tax within nine months of the date of death. If the estate is complex or the value is hard to determine, the executor can request a six-month extension by filing Form 4768. Even with an extension, the tax payment itself is still due nine months after death unless the executor has obtained a deferral agreement.

State estate tax important date vary. Some states follow the federal nine-month rule; others give more or less time. The executor should check the rules in the state where the deceased lived and in any state where the estate owns property.

Missing the important date can result in penalties and interest, which again reduces what heirs receive. This is another reason executors often work with professionals — the stakes are high and the rules are strict.

Who decides how much tax is owed

The executor (or their tax professional) calculates the estate's value as of the date of death. This valuation determines whether the estate exceeds the exemption threshold and how much tax is owed. The IRS can challenge the valuation if it seems too low, which can result in additional tax, penalties, and interest.

For most estates, the IRS does not audit the Form 706 return. But for large or complex estates, an audit is more likely. If the IRS disagrees with the valuation, the executor can appeal or negotiate, but the process can take years and cost significant professional fees.

Frequently Asked Questions

Can an heir refuse to accept an inheritance to avoid paying estate tax?

An heir can disclaim (refuse) an inheritance, which removes them from the line of succession. The disclaimed amount passes to the next heir in line. However, disclaiming does not reduce the estate tax bill — it only changes who receives the remaining assets. The estate still owes the same tax.

What if the estate is worth less than the exemption but the executor still files Form 706?

Filing Form 706 when not required is optional but sometimes done for strategic reasons. For example, if the deceased had a surviving spouse, filing can preserve the unused exemption amount for the spouse's later estate. There is no penalty for filing when not required, but there is a cost in professional fees.

Do life insurance proceeds count toward the estate tax threshold?

Yes, life insurance proceeds are included in the estate's value for tax purposes, even if they pass directly to a named beneficiary outside the will. This can push an estate over the exemption threshold. However, if the life insurance policy is owned by an irrevocable trust rather than the deceased, the proceeds may not be included.

Can the executor use the estate's money to pay their own fees?

Yes. The executor is may have access to to reasonable compensation for managing the estate, and this cost is paid from the estate before heirs receive their inheritance. The amount varies by state and by the complexity of the estate. Executors can also reimburse themselves for out-of-pocket expenses like court filing fees or professional advisor fees.

What happens if the executor and heirs disagree about how much tax is owed?

Heirs can request an accounting from the executor, which shows all estate transactions and tax payments. If heirs believe the executor made an error, they can challenge it in probate court. This is rare but can happen if the executor hired an inexperienced tax professional or made a calculation mistake.