Key Takeaways
- The 2024 federal estate tax exemption is $13.61 million per individual
- Married couples can effectively exempt $27.22 million combined
- Only estates exceeding the exemption threshold pay federal estate tax
- The federal estate tax rate is 40% on taxable amounts
- 12 states plus D.C. have their own estate taxes with lower exemptions
What Is the Estate Tax?
The estate tax is a tax on the transfer of a deceased person's assets to their heirs. Often called the "death tax," it applies only to estates that exceed certain threshold values. The tax is calculated on the fair market value of all assets owned at death, minus allowable deductions and the applicable exemption amount.
In 2024, the federal estate tax exemption is $13.61 million per individual. This means estates valued below this threshold owe no federal estate tax. For married couples using portability, the combined exemption can be up to $27.22 million.
How Estate Tax Works
The estate tax calculation follows these steps:
- Gross Estate: Total fair market value of all assets (real estate, investments, business interests, life insurance, etc.)
- Deductions: Subtract debts, funeral expenses, charitable bequests, and marital deductions
- Taxable Estate: Apply the exemption amount to determine the taxable portion
- Tax Calculation: The 40% federal rate applies to amounts exceeding the exemption
Pro Tip: Portability for Married Couples
When a spouse dies, their unused exemption can be transferred to the surviving spouse through "portability." This allows the surviving spouse to potentially use up to $27.22 million in combined exemptions. An estate tax return must be filed to elect portability, even if no tax is owed.
States with Estate Taxes
While most states do not have their own estate tax, 12 states and the District of Columbia impose estate taxes with exemptions typically lower than the federal level:
- Connecticut: $13.61 million exemption (matches federal)
- Hawaii: $5.49 million exemption
- Illinois: $4 million exemption
- Maine: $6.8 million exemption
- Maryland: $5 million exemption
- Massachusetts: $2 million exemption
- Minnesota: $3 million exemption
- New York: $6.94 million exemption
- Oregon: $1 million exemption
- Rhode Island: $1.77 million exemption
- Vermont: $5 million exemption
- Washington: $2.193 million exemption
- District of Columbia: $4.71 million exemption
Important: Exemption Sunset
The current high federal exemption ($13.61 million) is set to "sunset" at the end of 2025. Unless Congress acts, the exemption will revert to approximately $6-7 million (adjusted for inflation) starting in 2026. This could significantly impact estate planning for many families.
Estate Tax vs. Inheritance Tax
It's important to distinguish between estate tax and inheritance tax:
- Estate Tax: Paid by the estate before assets are distributed to heirs
- Inheritance Tax: Paid by beneficiaries who receive assets (6 states have this)
Some states have both, creating potential double taxation at the state level.
Frequently Asked Questions
The estate itself pays the tax before assets are distributed to beneficiaries. The executor or personal representative is responsible for filing the estate tax return (IRS Form 706) and paying any tax due from estate assets.
The federal estate tax return (Form 706) is due 9 months after the date of death. An automatic 6-month extension is available by filing Form 4768, but any tax owed is still due by the original deadline.
Life insurance proceeds are included in the taxable estate if the deceased owned the policy or had "incidents of ownership" (like the ability to change beneficiaries). However, life insurance owned by an irrevocable life insurance trust (ILIT) is generally excluded from the estate.
The gift tax and estate tax share the same unified exemption ($13.61 million in 2024). Taxable gifts made during your lifetime reduce your available estate tax exemption at death. The annual gift tax exclusion ($18,000 per recipient in 2024) allows tax-free gifts that don't count against your lifetime exemption.
Common estate tax reduction strategies include: making annual exclusion gifts, establishing irrevocable trusts, charitable giving, family limited partnerships, grantor retained annuity trusts (GRATs), and qualified personal residence trusts (QPRTs). Consult with an estate planning attorney and tax advisor to implement appropriate strategies.