Gavin Howe
Estate tax law refers to the tax levied on the transfer of a deceased person's property to their heirs. This tax is calculated based on the fair market value of the assets at the time of death, including cash, securities, real estate, insurance, trusts, annuities, and business interests. The estate tax is applicable only to estates exceeding a certain value threshold, which was $5.49 million per individual in 2017 and increased to $13.99 million in 2025. The tax is designed to limit the tax breaks that extremely wealthy households receive and ensure a more equitable distribution of wealth. However, it has also been a subject of debate, with some arguing for its repeal to avoid double taxation. Estate planning professionals assist individuals in navigating these complex laws and minimizing tax liability through strategic gifting, trust structuring, and wealth transfers.
| Characteristics | Values |
|---|---|
| Definition | A tax on the transfer of property at death |
| Taxed entities | Very large inheritances by a small group of wealthy heirs |
| Tax rate | 40% maximum rate |
| Taxed items | Cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets |
| Deductions | Mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities |
| Exemptions | $5.49 million per person or $10.98 million per married couple in 2017; $13.99 million per individual or $27.98 million for married couples in 2025 |
| Applicable states | 12 states impose estate taxes, and 6 have inheritance taxes |
| State tax rates | Range from less than 1% to 20% |
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What You'll Learn
Estate tax laws are complex and ever-changing
The estate tax laws are designed to limit the tax breaks that extremely wealthy households receive. The tax is imposed on the decedent's entire taxable estate before distribution to heirs, ensuring that a portion of the wealth is contributed to the federal revenue. The estate tax rate can be as high as 40%, but the effective tax rate is often much lower due to various deductions and exemptions. Additionally, heirs can employ strategies such as gifting, charitable contributions, and trusts to further reduce the taxable value of their inheritance.
The complexity of estate tax laws is further amplified by the distinction between estate tax and inheritance tax. While the estate tax is levied on the total value of the decedent's estate, the inheritance tax is imposed on the individuals who receive the property from the estate. In the United States, there is no federal inheritance tax, but a handful of states impose their own inheritance taxes with varying thresholds and rates.
Navigating estate tax laws can be challenging due to their dynamic nature and the involvement of multiple tax jurisdictions. It is crucial to stay informed about the latest changes in federal and state tax laws to ensure compliance and optimize tax planning. Consulting with professionals such as estate planning attorneys, financial advisors, or tax consultants can be beneficial in creating a tax-efficient plan tailored to one's specific circumstances. These experts can provide guidance on wealth transfers, trust structuring, and strategic gifting to maximize the assets passed on to beneficiaries while minimizing tax liability.
While estate tax laws may seem daunting, proactive planning and seeking expert advice can help individuals and families effectively manage their estates and make informed decisions regarding wealth distribution and tax obligations.
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Exemptions and deductions
The estate tax is a federal tax on the transfer of property at death. It is imposed on the decedent's entire taxable estate before distribution to heirs. The fair market value of the items is used to calculate the "Gross Estate", which may include cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets. After accounting for the Gross Estate, certain deductions are allowed to arrive at the "Taxable Estate". These deductions may include mortgages, debts, estate administration expenses, and property that passes to surviving spouses or qualified charities. Additionally, there may be special circumstances where reductions to value are permitted, such as for operating business interests or farms.
The federal estate tax exemption has increased over time. For 2025, the exemption is $13.99 million per individual or $27.98 million for married couples, with a maximum tax rate of 40%. However, this varies across states, with some imposing their own estate or inheritance taxes with different exemption amounts.
The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, by President Trump, further increased the estate and gift tax exemption to $15 million per individual, effective January 1, 2026. This change provides greater flexibility for long-term wealth transfer strategies and is indexed annually for inflation. The OBBBA also introduced new limitations and incentives for charitable giving, including adjusted gross income floors for deductibility, a permanent 60% limit for cash gifts, and a reinstated non-itemizer deduction.
It's important to note that estate taxes are due only on the portion of an estate's value that exceeds the exemption level. Heirs can also utilise deductions and other discounts to reduce the taxable value of the estate. These strategies are often employed by wealthy estates to minimise their tax liability.
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Who pays estate tax
Estate tax is a federal tax on the transfer of property at death. It is imposed on the decedent's entire taxable estate before distribution to heirs. The estate tax is best characterised as a tax on very large inheritances by a small group of wealthy heirs. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate's value that exceeds a specified exemption level. In 2017, the exemption level was $5.49 million per person (effectively $10.98 million per married couple). The exemption level in 2025 is $13.99 million per individual (or $27.98 million for married couples), with a maximum tax rate of 40%.
The top 10% of income earners pay more than 90% of the tax, with nearly 30% paid by the richest 0.1%. Few farms or family businesses pay the tax. In 2023, it was estimated that 7,130 individuals dying would leave estates large enough to require filing an estate tax return. Estates with a gross value under $12.92 million would not need to file this return. After allowing for deductions and credits, 3,960 estates owed tax.
Although there is no federal inheritance tax, six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—still tax some assets inherited from deceased persons. Iowa repealed its inheritance tax for deaths occurring on or after 1 January 2025. Whether inheritance is taxed depends on its value, your relationship to the person who passed away, and the prevailing rules and rates where you live. Surviving spouses and descendants of the deceased rarely, if ever, have to pay this tax.
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State inheritance tax
The estate tax is a federal tax on the transfer of property at death. It is imposed on the decedent's entire taxable estate before distribution to heirs. The estate tax is best characterised as a tax on very large inheritances by a small group of wealthy heirs. The federal estate tax is closely coordinated with the federal gift tax to prevent avoidance through lifetime transfers.
In addition to the federal estate tax, 12 states and the District of Columbia impose additional estate taxes, while six states levy inheritance taxes. Maryland is the only state that imposes both an estate and an inheritance tax. Estate taxes are paid by a decedent's estate before assets are distributed to heirs and are thus imposed on the overall value of the estate. Inheritance taxes, on the other hand, are remitted by the recipient of a bequest and are based on the amount distributed to each beneficiary.
Most estate and inheritance taxes are progressive, with the tax rate increasing with the total value of the decedent's assets. Hawaii and Washington have the highest top marginal estate tax rate at 20%, assessed on estates valued at $15.49 million and $9 million, respectively. Connecticut is the only state with a flat estate tax rate of 12%. Iowa has the lowest inheritance tax rate in the nation at 2%, while Kentucky and New Jersey have the highest top marginal inheritance tax rate of 16%.
New York is one of the 12 states that has its own estate tax. Although New York's estate tax is progressive and only levied on certain high-value estates, the burden of unexpected fees and penalties can pose a very real risk to executors, heirs, and beneficiaries. New York reserves the right to levy an estate tax on a deceased person's assets and interests, which is adjusted each year to keep up with inflation.
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Strategic estate planning
Estate tax is a federal tax on the transfer of property at death. It is imposed on the decedent's entire taxable estate before distribution to heirs. The fair market value of these items is used, not necessarily what you paid for them or what their values were when acquired. The total of all these items is your "Gross Estate". The estate tax rate ranges from 18% to 40%.
- Trusts and Gifting Strategies: Use trusts, such as spousal lifetime access trusts and irrevocable life insurance trusts (ILITs), to transfer assets and provide financial security for your spouse and heirs while minimising tax liabilities.
- Annual Exclusion Gifts: Take advantage of the annual exclusion amount, which allows you to transfer up to a certain amount ($19,000 as of 2023) to another person federal gift tax-free. Spouses can also split gifts to maximise this benefit.
- Charitable Giving: Reduce your taxable estate by donating to qualified charities. Options like Charitable Remainder Trusts and Charitable Lead Trusts provide tax benefits while allowing you to support charitable causes.
- Exemption Limits: Be aware of the exemption levels, which are the specified amounts of an estate's value that are exempt from estate taxes. In 2025, the federal estate tax exemption is $13.99 million per individual or $27.98 million for married couples.
- Life Insurance: Utilise life insurance to provide financial security for your heirs and cover estate taxes.
- Professional Guidance: Consult with an estate planning attorney or tax professional to navigate the complex strategies and ensure compliance with state-specific laws and regulations.
By implementing these strategic estate planning techniques, individuals can effectively manage their estates, minimise tax liabilities, and ensure their assets are distributed according to their wishes.
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Frequently asked questions
Estate tax law is a federal tax on the transfer of property at death. It is imposed on the decedent's entire taxable estate before distribution to heirs.
An estate for tax purposes includes everything the deceased owned or controlled, such as homes, bank accounts, investments, cash, securities, insurance, trusts, annuities, business interests, and other assets.
Estate tax is paid by the estate itself, before assets are distributed to beneficiaries. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate's value that exceeds a specified exemption level.
The exemption level for estate tax varies over time and depending on the jurisdiction. In 2025, the federal estate tax exemption is $13.99 million per individual (or $27.98 million for married couples), with a maximum tax rate of 40%.
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