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Estate tax: What it is and who pays it
An estate tax is a tax that applies to the transfer of property and other assets after a person’s death. The topic can be a complex and confusing, especially for people who are planning their own estates or helping their loved ones with theirs.
What is an estate tax?
When someone dies, all their money, belongings, and business interests need to be passed to others. Added together, those things make up the deceased person’s estate. An estate can include cash, investments, life insurance, real estate, collectables, and more. It is basically anything of value that is left behind.
The estate tax is a federal tax that is applied to the value of the estate. It isn’t owed by the people who inherit the assets but by the estate itself. Sometimes, if there is not enough cash to cover estate taxes, some assets from the estate will need to be liquidated to pay them. Fortunately, most families will not have to worry about federal estate taxes. An estate must be of considerable value before any taxes are owed.
2024 Federal estate tax exemption: $13.61 million per person.
If your estate is below that, and you haven’t used a portion of the lifetime gift tax exemption (see below), no federal estate taxes will be due. In addition, there is no limit to assets that can be transferred to a surviving spouse, so anything left to your spouse is tax exempt.
Federal estate tax brackets
If your estate exceeds the federal estate tax exemption, the amount over the exemption will be taxed anywhere from 18% to 40%, depending on the size of the estate. Here is the chart from the IRS as of 2023:
|
18% |
$0 |
|
|
20% |
$1,800 |
|
|
22% |
$3,800 |
|
|
24% |
$8,200 |
|
|
26% |
$13,000 |
|
|
28% |
$18,200 |
|
|
30% |
$23,800 |
|
|
32% |
$38,800 |
|
|
34% |
$70,800 |
|
|
37% |
$155,800 |
|
|
39% |
$248,300 |
|
|
40% |
$345,800 |
When looking at this chart, it’s important to remember that the estate pays only the rate on the amount within that bracket. For example, if the estate has a taxable amount of $15,000, it will owe the flat base tax of $1,800 and 20% on the remaining $5,000.
Which states have estate taxes?
As of 2024, there are 12 states that have their own estate taxes, which are in addition to federal estate taxes. Those states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington state, plus the District of Columbia. The exclusion amounts for these state taxes are generally lower than the federal exclusion, so it can be common to pay state estate taxes and not federal ones. Six states also have inheritance taxes, which are different. Instead of the estate paying these taxes, the person who inherits the assets is responsible for them. Read more about state inheritance taxes.
Who pays estate taxes?
Estate taxes are paid by the estate before the amount can be distributed to beneficiaries. They are usually paid by the executor or administrator of the will and/or trust of the deceased, but if there are issues, a court might get involved. With few exceptions, the people inheriting the assets do not owe taxes on them. As with all things related to taxes, it’s important to consult a tax or estate planning professional.
How do you reduce or avoid estate taxes?
There are several ways you can potentially reduce your estate tax burden when passing assets on to your loved ones. In fact, this is what much of the estate planning industry is built around. Using gifting throughout your life can help you lower your estate (see below), but the most useful tools you can use are various types of trusts. Used smartly, they can shield assets from liabilities and creditors, and help you transfer wealth effectively.
Lifetime gift tax exemption and estate taxes
Everyone is allowed to gift a certain amount every year without paying taxes. That number changes every few years; it is $18,000 in 2024. Even if you go over this gift exclusion, you don’t normally pay taxes. Instead, your lifetime gift tax exemption is lowered. Functionally, the lifetime gift tax exemption and estate tax exemption are the same. Using one reduces the other. This interaction can be confusing, but it can have big implications on how you handle your estate planning. Consult a tax professional for advice if you’ve given large gifts.
Frequently asked questions
An estate tax is paid by the estate on the full value of the assets. An inheritance tax is paid by the beneficiary on the amount received. Only six states have inheritance taxes. Read more about inheritance taxes.
The decision between gifting or willing property is a personal one that should be based on your specific situation and goals, but many professionals will tell you it is usually better for heirs to inherit real estate.
The federal government can put liens on assets within the estate or make a priority claim against it.
There are no currently available numbers from the Census Bureau on this subject, but it’s estimated to be less than 1%.
No. The tax is paid by the estate before assets are distributed to beneficiaries.
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This article is provided for your informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.