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Top 10 Facts About Estate Tax

Estate taxes can feel confusing, especially when you're dealing with the loss of a loved one. Worrying about how much of your inheritance might go to taxes—whether it's an estate tax, inheritance tax (hereditary tax)—can add extra stress. The good news is that not every estate will owe these taxes.

Table of contents

Key Takeaways:...Read more

1. Federal estate taxes only apply to large estates...Read more

2. Estate taxes are triggered by high-value estates...Read more

3. Estate taxes and inheritance taxes are not the same...Read more

4. The estate is responsible for paying the tax...Read more

5. Some states impose additional estate taxes...Read more

6. Transfers to a surviving spouse are tax-exempt...Read more

7. Gift tax exemptions can reduce state taxes...Read more

8. The average estate tax rate is around 18%...Read more

9. Large estates often include untaxed capital gains...Read more

10. Federal estate tax threshold to decrease in 2026...Read more

Key Takeaways:

Estate tax is paid by the estate, while inheritance tax, which varies by state, is paid by the beneficiary.
Transfers to a surviving spouse are exempt from federal estate tax, helping to protect the full value of inherited assets.
The federal estate tax exemption will decrease in 2026, potentially subjecting more estates to taxation.

1. Federal estate taxes only apply to large estates

Federal estate taxes, often referred to as the “death tax,” only apply to estates that are quite large. The federal estate tax exemption for 2023 was $12.92 million, going up to $13.61 million in 2024. This means if everything you own—your home, investments, personal property, etc.—is valued below that amount, your estate won’t owe any federal estate taxes. For married couples, the exemption is doubled, allowing up to $27.22 million to be passed on tax-free. To give a death tax example, imagine an estate worth $15 million. Since the exemption is $13.61 million, only the remaining $1.39 million would be subject to the death tax. For most people, federal estate taxes aren’t a concern, but if your estate is larger, careful planning can help reduce the tax burden and ensure that more of your assets go to your heirs, not the IRS.

2. Estate taxes are triggered by high-value estates

Estate taxes, or federal estate taxes, only apply if your estate is worth more than the exemption limit. In 2024, this limit is $13.61 million. Real estate taxation is part of the overall estate value. If your estate is worth less than the limit, you won’t have to pay federal estate taxes. If it’s worth more, planning can help reduce the tax you owe.If it’s worth more, planning can help reduce the tax you owe. It’s always a good idea to consult with a tax advisor to understand these rules.

3. Estate taxes and inheritance taxes are not the same

Estate taxes and inheritance taxes are distinct, though they both involve taxes on assets after someone’s death. Estate taxes are imposed on the entire value of the estate before any assets are distributed. This tax is applied to the amount over the threshold, with rates ranging from 18% to 40%. Inheritance taxes, on the other hand, are paid by the beneficiaries who receive assets from the estate. Each beneficiary must pay inheritance tax based on the value of what they inherit and their relationship to the deceased. The rates and exemptions for inheritance tax vary by state. So, while the estate pays the estate tax on its total value, each beneficiary is responsible for paying inheritance tax on the value of the inheritance they receive. Understanding both estate tax and inheritance tax helps you plan better for potential tax liabilities.

4. The estate is responsible for paying the tax

When it comes to settling an estate, the estate itself is responsible for paying the estate tax, often referred to as the death tax. This means that before any assets are distributed to heirs, the estate must first cover any estate taxes owed. The tax is calculated based on the total value of the estate at the time of death, and it must be paid using the estate's assets. This can include cash from the estate’s bank accounts, proceeds from selling property or using other assets. The executor of the estate manages this process, ensuring that the estate tax is paid before distributing the remaining assets to the beneficiaries. It’s important to understand that this tax burden falls on the estate, not the heirs directly.

5. Some states impose additional estate taxes

In addition to the federal estate tax, which is governed by the federal estate tax exemption 2023, some states impose their own estate taxes. This means that even if an estate falls below the federal exemption limit, it might still be subject to state estate taxes. These state-level taxes can vary significantly, with each state setting its own exemption amounts and tax rates. For example, states like Massachusetts and Oregon have their own thresholds that are lower than the federal limit, so estates with values below the federal exemption could still face state estate taxes. This can result in additional tax obligations beyond the federal estate tax. Some states also impose a federal inheritance tax or a hereditary tax on inherited assets, which is separate from estate taxes. This means beneficiaries may have to deal with state-specific taxes on their inherited assets.

Infographic entitled States That Impose Estate Tax listing states that collect death tax.

6. Transfers to a surviving spouse are tax-exempt

When it comes to estate planning, transfers of assets to a surviving spouse are typically exempt from the death tax. This means that any property, money, or other assets passed on to a spouse do not count towards the estate tax calculation. Under the estate tax exemption rules, the full value of assets transferred to a surviving spouse is not subject to the federal estate tax, regardless of the size of the estate. This exemption simplifies the estate settlement process, allowing the surviving spouse to receive the full value of their inheritance without having to pay estate tax on it. This benefit ensures that the surviving spouse can keep all the assets left to them.

7. Gift tax exemptions can reduce state taxes

Gift tax exemptions offer a way to reduce the impact of death tax on an estate. By using these exemptions, individuals can give away a certain amount of money or assets each year without incurring gift tax. For 2024, the annual gift tax exclusion is $18,000 per recipient. This means you can give up to $18,000 to each person annually without triggering any gift tax. These gifts are not counted towards the estate’s value, which can lower the amount subject to federal estate tax when the person passes away. This strategy helps in reducing the overall value of the estate, potentially decreasing the death tax owed. Additionally, while some states might impose their own hereditary tax on inherited assets, making use of gift tax exemptions can still help in managing and reducing the estate's tax burden.

8. The average estate tax rate is around 18%

When discussing estate taxes, it’s important to note that the average estate tax rate is around 18%. This rate applies to the portion of an estate’s value that exceeds the federal estate tax exemption. The federal estate tax uses a progressive rate system. This means that the more an estate exceeds the exemption limit, the higher the tax rate on that excess amount. The average rate of 18% reflects the typical tax burden on estates falling within a mid-range of the exemption limit. However, the rate can increase significantly for estates far above the exemption threshold, reaching up to 40% for very large estates.It’s also important to understand that while federal estate tax is a common concern, federal inheritance tax does not apply, as the US does not impose such a tax.

Infographic entitled Estate Taxes Rate showing the progressive estate tax rates.

9. Large estates often include untaxed capital gains

Large estates frequently contain assets with significant unrealized capital gains (real estate, stocks, art collections). These gains are the increase in asset value that hasn’t been taxed because the owner did not sell the asset. In the current tax system, capital gains tax is due only when the asset is sold, so if the owner holds onto it until death, those gains remain untaxed. The estate tax plays a major role here. When someone dies, the estate benefits from a "step-up in basis," which adjusts the value of these assets to their market value at the time of death. This means the unrealized gains are not taxed before the asset is transferred to heirs. Without the estate tax, a significant portion of the wealth inherited, including these untaxed capital gains, would go completely without federal inheritance tax. The estate tax was designed to address this gap and ensure that income from wealthy taxpayers, which might otherwise escape taxation, is taxed when it passes through the estate.

10. Federal estate tax threshold to decrease in 2026

The federal estate tax threshold is set to decrease on January 1, 2026. Right now, the exemption limit for federal estate tax is $13.61 million, meaning estates valued below this amount are not subject to federal estate tax. However, after December 31, 2025, this threshold will revert to approximately $5 million, adjusted for inflation. With this change, estates valued around $6.8 million could be subject to federal estate tax. This means that more estates might face hereditary tax under the new limit. It's important to plan ahead, as this adjustment could impact how much your heirs will owe in taxes, making estate planning even more critical. Estate taxes are an important consideration in estate planning, especially with the upcoming changes to the federal estate tax threshold in 2026. Planning now ensures your assets are passed on with minimal taxes, protecting what you leave behind for your loved ones.

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