Estate Tax Guide: Who Actually Pays, and How to Plan

9 min read

Who Actually Pays Estate Tax?

Estate tax has a reputation that far outpaces its reach. Surveys consistently show that most Americans believe their estate will be subject to it. The reality is that the federal estate tax applies to only the wealthiest fraction of estates — fewer than one in five hundred typically owe any federal estate tax in a given year.

That said, understanding how the estate tax works matters for anyone who is building wealth, owns appreciating real estate, or has a family business. And for people in states that impose their own estate taxes, the thresholds are significantly lower.

This guide covers the federal estate tax, state estate taxes, inheritance taxes, and the strategies used to minimize exposure.

How the Federal Estate Tax Works

The federal estate tax is a tax on the transfer of wealth at death. It applies to the total taxable estate — the fair market value of everything you owned at the time of death, minus allowable deductions like debts, funeral expenses, and assets passing to a surviving spouse or qualifying charity.¹

The Federal Exemption Amount

For 2024, the federal estate tax exemption is $13.61 million per individual.² This means that only the portion of your estate above that threshold is subject to tax. The top federal estate tax rate is 40 percent — but it only applies to amounts above the exemption.¹

A married couple can effectively double this protection through a concept called portability. When the first spouse dies, any unused portion of their exemption can be transferred to the surviving spouse — but only if the estate timely files a federal estate tax return electing portability, even if no tax is owed.³ A surviving spouse who inherits portability can shield up to $27.22 million from federal estate tax in 2024.

The 2025 Sunset

The current high exemption levels were established by the Tax Cuts and Jobs Act of 2017 and are scheduled to expire on December 31, 2025.⁴ If Congress takes no action, the exemption will revert to approximately $7 million per person (adjusted for inflation). For people with estates between roughly $7 million and $13 million, this change could create a federal estate tax liability where none currently exists.

As of 2024, there is genuine uncertainty about whether Congress will extend the higher exemptions. If you are in the range where the sunset matters, it is worth reviewing your plan now rather than waiting.

What Is Included in the Taxable Estate

The taxable estate includes more than most people expect. It encompasses:

• Real estate (at fair market value, including appreciated property)
• Investment and brokerage accounts
• Retirement accounts such as IRAs and 401(k)s
• Life insurance proceeds — if you own the policy, the death benefit is included in your estate
• Business interests
• Personal property, vehicles, and collectibles
• Certain gifts made in the years before death

The unlimited marital deduction allows spouses to leave any amount to each other free of estate tax.³ The charitable deduction allows unlimited transfers to qualifying charities. Both reduce the taxable estate dollar for dollar.

State Estate Taxes: The Hidden Risk

Twelve states plus Washington DC have their own estate taxes, and their exemption thresholds are often far below the federal level.⁵ Even if your estate is nowhere near the federal exemption, you may owe state estate tax.

States with Estate Taxes and Their Exemptions (2024)

Oregon deserves special attention: with a $1 million exemption, a home in Portland combined with retirement savings and investment accounts can push a modest estate above the threshold.⁶ Massachusetts similarly catches families who own appreciated real estate in expensive markets — the state raised its threshold to $2 million for decedents dying on or after January 1, 2023, and provides a credit that eliminates tax for estates at or below that level.⁷

State estate tax rates typically range from 8 to 20 percent on amounts above the exemption, and unlike the federal system, most states do not offer portability between spouses.⁵ Planning at the state level often requires different strategies than federal planning.

Moving States as an Estate Tax Strategy

Some people relocate to states without estate taxes as part of their planning. States with no estate tax include Florida, Texas, Nevada, Arizona, and most of the South and Mountain West. This is a legitimate consideration for people who would otherwise owe significant state estate tax, though the decision involves more than just taxes.

Estate Tax vs. Inheritance Tax: What Is the Difference?

Estate tax and inheritance tax are not the same thing, though they are frequently confused.

Estate tax is paid by the estate itself before assets are distributed. If an estate owes federal estate tax, the executor pays it from estate funds before anything goes to heirs.

Inheritance tax is paid by the person who receives an inheritance. The tax rate often depends on the relationship between the beneficiary and the deceased. Spouses are typically exempt. Children often pay a lower rate. More distant relatives or unrelated beneficiaries pay more.

Currently, only six states impose an inheritance tax: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.⁵ Maryland is unique in having both an estate tax and an inheritance tax.⁵

If you live in a state with an inheritance tax and you are leaving assets to someone other than a spouse or child, they may owe tax on what they receive — and the rate can be substantial for more distant relatives.

Basic Estate Tax Reduction Strategies

If your estate is large enough to be concerned about estate taxes, the fundamental strategy is the same regardless of the specific tool used: get assets out of your estate while you are alive, ideally in a way that also benefits your heirs or a cause you care about.

Annual Gifting

The IRS allows you to give up to $18,000 per person per year in 2024 (the annual gift tax exclusion) without using any of your lifetime exemption or filing a gift tax return.⁸ A married couple can give $36,000 per year to each recipient. Over many years, this can meaningfully reduce a taxable estate.

Payments made directly to educational institutions for tuition, or directly to medical providers for medical expenses, are also excluded from gift taxes entirely — with no dollar limit.⁸ Funding a grandchild’s college costs directly, for example, can be a powerful wealth-transfer strategy.

Irrevocable Trusts

Assets transferred into an irrevocable trust are generally no longer part of your taxable estate. Several trust structures are used specifically for estate tax reduction:

Irrevocable Life Insurance Trust (ILIT): Life insurance owned by the insured is included in their taxable estate. By placing a life insurance policy in an ILIT, the death benefit passes outside the estate, allowing heirs to receive funds tax-free and providing liquidity to pay estate taxes or other expenses.

Spousal Lifetime Access Trust (SLAT): One spouse creates an irrevocable trust for the benefit of the other spouse (and often children), removing assets from the taxable estate while still allowing indirect access through the beneficiary spouse.

Grantor Retained Annuity Trust (GRAT): The grantor transfers assets into the trust and receives fixed annuity payments for a set term. Any appreciation above a benchmark rate passes to heirs free of gift or estate tax. GRATs work best when interest rates are low and the assets inside appreciate significantly.

Charitable Giving Strategies

Charitable bequests reduce the taxable estate dollar for dollar. Charitable remainder trusts allow you to transfer appreciated assets, receive an income stream during your lifetime, and leave the remainder to charity — while also generating a current income tax deduction.

A qualified charitable distribution (QCD) from an IRA directly to a charity also satisfies required minimum distributions without increasing your taxable income, which indirectly helps preserve the estate for heirs.

Portability Election for Married Couples

As noted above, portability allows a surviving spouse to use the deceased spouse’s unused exemption. This can be enormously valuable, but it requires filing a federal estate tax return within nine months of death (extendable to fifteen months).³ The return must be filed even if no estate tax is owed. Failing to file forfeits the portability election permanently.³

When Should You Start Planning?

Estate tax planning is most effective when started early, because many strategies require time to work. Irrevocable trusts have look-back periods. Gifting strategies compound over years. The 2025 sunset creates a specific urgency for estates above $7 million.⁴

If your estate — including retirement accounts, life insurance, business interests, and real estate — could approach $7 million or more by the time you die, it is worth having a conversation with an estate planning attorney and a CPA now. The strategies available before death are far more powerful than anything that can be done after the fact.

For everyone else, estate tax is likely not your most pressing estate planning concern — but making sure your will, trust, and beneficiary designations are in order is.

References

1. Estate Tax - Internal Revenue Service, accessed June 2026, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
2. What’s New — Estate and Gift Tax - Internal Revenue Service, accessed June 2026, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
3. Frequently Asked Questions on Estate Taxes - Internal Revenue Service, accessed June 2026, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
4. Treasury, IRS: Making Large Gifts Now Won’t Harm Estates After 2025 - Internal Revenue Service, accessed June 2026, https://www.irs.gov/newsroom/treasury-irs-making-large-gifts-now-wont-harm-estates-after-2025
5. Estate and Inheritance Taxes by State, 2025 - Tax Foundation, accessed June 2026, https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
6. Estate Transfer and Fiduciary Income Taxes - Oregon Department of Revenue, accessed June 2026, https://www.oregon.gov/dor/programs/businesses/pages/estate.aspx
7. FAQs: New Estate Tax Changes - Massachusetts Department of Revenue, accessed June 2026, https://www.mass.gov/info-details/faqs-new-estate-tax-changes
8. Frequently Asked Questions on Gift Taxes - Internal Revenue Service, accessed June 2026, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
9. Instructions for Form 706 - Internal Revenue Service, accessed June 2026, https://www.irs.gov/instructions/i706
10. How Do State and Local Estate and Inheritance Taxes Work? - Tax Policy Center, accessed June 2026, https://taxpolicycenter.org/briefing-book/how-do-state-and-local-estate-and-inheritance-taxes-work
11. Estate and Gift Tax FAQs - Internal Revenue Service, accessed June 2026, https://www.irs.gov/newsroom/estate-and-gift-tax-faqs

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