What Is the Estate Tax?

The estate tax is a federal tax on the transfer of a deceased person’s assets to their heirs or beneficiaries. Sometimes referred to as the “death tax,” this tax applies only to estates exceeding a certain value threshold set by federal law. It is not a tax on the beneficiaries themselves, but rather on the estate before assets are distributed. The estate’s executor is responsible for calculating and paying any tax owed, typically using funds from the estate itself.

Estate tax laws are distinct from inheritance taxes, which are imposed on the recipients of the inheritance rather than on the estate. While the federal government levies an estate tax, some states also impose their own version of an estate or inheritance tax, with different exemption levels and rates.

History of the Estate Tax

The estate tax in the United States dates back to 1916, when it was introduced as a way to raise revenue during wartime and to curb the concentration of wealth among the nation’s wealthiest families. Over the years, it has been the subject of political debate, with supporters viewing it as a tool for promoting economic equality and opponents criticizing it as a penalty on saving and investment.

Despite calls for repeal at various points in history, the estate tax has remained in place, though the exemption levels and tax rates have shifted significantly. The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily doubled the exemption, dramatically reducing the number of estates subject to the tax. Unless Congress takes further action, the exemption is scheduled to revert to lower levels in 2026.

How the Federal Estate Tax Works

The federal estate tax applies to the total value of an individual’s estate at death, minus any deductions and exemptions. The calculation begins with the “gross estate,” which includes:

• Real estate
• Financial accounts
• Business interests
• Personal property
• Life insurance proceeds (if the decedent owned the policy)

Certain deductions reduce the taxable estate. These include funeral expenses, debts, charitable contributions, and transfers to a surviving spouse (which generally qualify for an unlimited marital deduction).

After applying deductions, what remains is the “taxable estate.” If the taxable estate exceeds the federal estate tax exemption in place at the time of death, it may be subject to a progressive tax rate — with a top federal rate of 40% as of current law.

Federal Exemption Amount

As of 2025, the federal estate tax exemption is $13.99 million per individual, or $27.98 million for a married couple using proper planning. This exemption effectively shields most estates from taxation. However, estates exceeding that amount must file a federal estate tax return (IRS Form 706) and may owe taxes on the excess.

The exemption is portable between spouses, meaning that a surviving spouse can use any unused portion of the deceased spouse’s exemption if the appropriate election is made on a timely filed estate tax return. This portability provision simplifies estate planning for many couples but still requires attention to documentation and filing deadlines.

Unless extended or modified by Congress, the exemption is scheduled to drop significantly in 2026 when provisions of the TCJA sunset. The lower exemption will mean more estates may become subject to taxation starting that year.

State-Level Estate and Inheritance Taxes

In addition to the federal estate tax, several states impose their own estate or inheritance taxes. These state-level taxes have separate thresholds, rates, and rules. States with estate taxes include Oregon, Massachusetts, and Washington, among others. Some states impose inheritance taxes instead, which are levied on the beneficiaries rather than the estate.

A few states have both estate and inheritance taxes, and the tax burden can vary based on the relationship between the decedent and the beneficiary. For example, spouses and direct descendants are often exempt or taxed at lower rates than more distant relatives or unrelated individuals.

Individuals living in or owning property in states with such taxes should include state-specific planning strategies in their overall estate plan.

Estate Planning Strategies to Minimize Tax

There are several legitimate strategies that individuals may use to reduce or eliminate estate tax liability. These typically involve transferring wealth during life or structuring ownership to take advantage of exclusions and valuation discounts. Common approaches include:

• Lifetime gifting: Using the annual gift tax exclusion and lifetime exemption to transfer assets out of the estate.
• Irrevocable trusts: Shifting assets into trusts that are not included in the taxable estate.
• Grantor retained annuity trusts (GRATs) and charitable remainder trusts (CRTs): Leveraging the time value of money and charitable deductions.
• Family limited partnerships (FLPs) or LLCs: Structuring business ownership to reduce valuation and facilitate discounted transfers.

Each of these strategies has legal, tax, and administrative implications. Professional guidance from an estate attorney or tax advisor is essential to ensure compliance and effectiveness.

Filing Requirements and Deadlines

If a deceased person’s estate exceeds the federal exemption amount, the estate’s representative is required to file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The form must generally be filed within nine months of the date of death, though a six-month extension can be requested.

The estate tax return includes a detailed inventory of all assets and liabilities, valuation documentation, and calculation of the tax due. Payment of the tax is also due within the same timeframe, and the IRS may charge interest or penalties for late filings or payments.

If portability of the deceased spouse’s unused exemption is desired, the estate must file Form 706 even if no tax is owed — making proper filing crucial in many non-taxable estates as well.

Estate Tax vs. Gift Tax and Generation-Skipping Transfer Tax

The estate tax is part of a broader system that includes the federal gift tax and the generation-skipping transfer (GST) tax. Together, these taxes are designed to prevent individuals from avoiding estate tax by giving away assets before death or skipping generations.

The gift tax applies to transfers made during life that exceed annual or lifetime limits. The GST tax applies to transfers made to grandchildren or individuals at least two generations younger, and it is assessed in addition to estate or gift taxes.

Importantly, the federal lifetime exemption applies to both estate and gift taxes combined. This means that large lifetime gifts reduce the available exemption at death. Coordination across all three taxes is necessary to manage long-term wealth transfer effectively.

Who Actually Pays the Estate Tax?

Despite common concerns about the reach of the estate tax, relatively few estates pay it. According to IRS data, fewer than 0.1% of estates owe any federal estate tax due to the high exemption threshold. Those that do are typically large estates with complex holdings.

However, individuals who own appreciating assets such as closely held businesses, real estate portfolios, or significant investment accounts should still consider the estate tax in their long-term planning. Future changes to tax law, family structure, or asset values can make what was once an untaxed estate suddenly taxable.

The Bottom Line

The estate tax is a transfer tax on wealth at death that applies only to estates exceeding a substantial exemption amount. While relatively few families pay it under current law, it remains a critical consideration for high-net-worth individuals and business owners. Understanding how the tax is calculated, how it interacts with other transfer taxes, and how to use planning tools to manage exposure can help families preserve wealth across generations.