Estate Tax is a federal tax imposed on the transfer of a deceased person’s assets to their heirs and beneficiaries. Often called the “death tax,” this tax applies only to estates exceeding substantial exemption thresholds, making it relevant primarily to high-net-worth individuals. The estate tax is calculated on the fair market value of all assets owned at death, including real estate, investments, business interests, retirement accounts, life insurance proceeds, and personal property.
For 2024, the federal estate tax exemption is $13.61 million per individual ($27.22 million for married couples with proper planning), meaning estates valued below these amounts owe no federal estate tax. This exemption is historically high due to the Tax Cuts and Jobs Act, which doubled the previous exemption amount. However, this enhanced exemption is scheduled to sunset after 2025, potentially reverting to approximately $7 million per person (adjusted for inflation) unless Congress extends or modifies the provision.
Estate tax rates are progressive, starting at 18% and reaching a top rate of 40% on amounts exceeding the exemption. The tax applies to the total estate value above the exemption threshold, not the entire estate. The estate itself, rather than beneficiaries, is responsible for paying the estate tax before assets are distributed to heirs.
Certain transfers avoid estate tax, including assets passing to a surviving spouse (unlimited marital deduction), qualifying charitable donations, and properly structured trusts. Portability provisions allow surviving spouses to use any unused exemption from their deceased spouse, effectively preserving the couple’s combined exemption amount.
Twelve states and the District of Columbia impose separate state estate or inheritance taxes with varying exemption amounts, typically much lower than the federal exemption. These state taxes can significantly impact estates even when no federal estate tax is owed.
Estate tax planning strategies include making lifetime gifts to reduce estate value, establishing irrevocable trusts, purchasing life insurance to provide liquidity for tax payments, utilizing annual gift tax exclusions ($18,000 per recipient for 2024), and charitable giving. Estates exceeding exemption amounts must file Form 706 (United States Estate Tax Return) within nine months of death, with extensions available.
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