What You Need to Know About Estate Taxes

Editor's note: This post was originally published Sept. 3, 2020, and has been updated for accuracy, comprehensiveness and freshness on July 8, 2025.

Estate planning can feel overwhelming, especially when you're trying to understand complex tax implications. What is estate tax? Simply put, it's a federal tax on a deceased person's assets before they're passed to heirs. It also includes state taxes levied by the decedent's state of residence. While many people confuse estate tax with inheritance tax or probate tax, understanding these distinctions is crucial for effective estate planning.  

Estate taxes only affect a small percentage of wealthy estates, but knowing how they work helps every family plan better. We aim to help explain everything you need to know about estate tax rates, limits, and strategies to protect your family's inheritance.

Estate tax meaning and basics  

The estate tax meaning is straightforward: it's a federal tax levied on the total value of a deceased person's estate. The IRS only applies estate tax to estates exceeding a specific threshold. In 2024, that threshold was $13.61 million. This means most American families won't face this tax burden.  

However, understanding estate taxes remains important. Planning ahead helps preserve more wealth for your heirs. State taxes may apply even when federal taxes don’t. You also want to plan for the fact that estate values can grow significantly over time, which can change the way your estate will be taxed. It’s always essential to remember that tax laws can change, potentially affecting future generations.

What is federal estate tax vs. other taxes?  

It's essential to distinguish between different types of taxes:  

• Federal estate tax: Paid by the estate before assets are distributed  
• Inheritance estate tax: Paid by individuals receiving assets (state-level)  
• Probate tax: Administrative costs during the probate process  

What assets are included in federal estate tax calculations?  

When calculating federal estate tax, the IRS includes virtually all assets:  

• Real estate properties  
• Bank accounts and investments  
• Stocks, bonds, and retirement accounts  
• Life insurance policies (in some cases)  
• Personal property with significant value  
• Business interests  

Deductions are allowed for items like outstanding debts and mortgages, as well as funeral and administrative expenses. Charitable donations may qualify as tax deductions. Spousal transfers also count as an unlimited deduction.  

How does federal estate tax work?  

Understanding estate taxes means knowing both the process and who is responsible. When someone dies, their estate may be subject to an estate tax, sometimes called the death tax, which is charged on the transfer of property. The estate itself, not the heirs, is responsible for paying the tax. The executor or personal representative must file the required paperwork and pay any taxes owed before assets can be distributed.

How is estate tax calculated?  

Calculating estate tax involves several key steps:  

1. Determine fair market value of all assets.  
2. Subtract allowable deductions (debts, expenses, charitable gifts).  
3. Apply the unified credit (exemption amount).  
4. Calculate tax on the remaining amount using progressive rates.  

The calculate estate tax formula becomes: (Total Estate Value - Deductions - Exemption) × Tax Rate = Estate Tax Owed  

Federal estate tax rates and percentages  

Estate tax rates are progressive, meaning higher estate values face higher tax percentages. Currently, rates range from 18% to 40% on amounts exceeding the federal exemption. You’ll want to check with a knowledgeable lawyer to find out what the estate tax rates are in your area.  

Here are a few estate tax examples to help you understand the concept a bit better:

• Estate worth $15 million (2024): ($15M - $13.61M exemption) × 40% = $556,000 in federal estate tax  
• Estate worth $10 million: No federal estate tax owed (below exemption threshold)  

Federal estate tax limits and exemptions  

The estate tax limit determines which estates actually owe taxes. This threshold changes annually and has increased significantly over the years.  

Current federal estate tax exemption

For 2024, the federal estate tax exemption is $13.61 million per individual. Married couples can combine their exemptions for a total of $27.22 million when proper planning is implemented. Once again, it’s important for you to consult with a lawyer in your area to find out what the estate tax exemption is for your situation.  

When do estate taxes take effect?

Federal estate taxes only kick in when an estate's value exceeds the federal exemption threshold. This means:  

• Less than 1% of estates pay federal estate tax.  
• Most middle-class families won't face estate tax obligations.  
• Wealthy families need strategic planning to minimize tax impact.  

The exemption amount is indexed for inflation, so it typically increases each year.  

State vs. federal estate and inheritance taxes

While federal estate taxes affect few families, state-level taxes can impact more estates due to lower exemption thresholds.  

Which states have estate or inheritance taxes?

States with estate taxes include:  

• Massachusetts (exemption: $2 million)
• Oregon (exemption: $1 million)  
• Washington (exemption: $2.193 million)  
• Connecticut, Hawaii, Illinois, Maine, Maryland, Minnesota, New York, Rhode Island, Vermont  

States with inheritance taxes include:  

• Pennsylvania  
• New Jersey  
• Maryland  
• Kentucky  
• Iowa  
• Nebraska  

Some states have both estate and inheritance taxes, creating additional complexity for estate planning.  

What is probate tax?  

The federal probate tax is a tax on the total value of a person’s estate at the time of death. This only applies to estates exceeding the $13.9 million threshold. The state probate tax varies depending on the state, but only in states that meet the threshold of the estate value set by that state. Ask your lawyer for specifics regarding federal and state probate taxes. The tax amount is calculated based on the fair market value of the assets at the time of death.

These costs vary by state but generally include:  

• Court filing fees  
• Attorney fees  
• Executor compensation  
• Appraisal costs  

Probate taxes are usually much smaller than estate taxes but can still reduce the inheritance your heirs receive.  

How to reduce or avoid estate taxes

Strategic planning can significantly reduce or eliminate estate tax obligations. Here are proven strategies:  

Use trusts strategically  

Irrevocable trusts remove assets from your taxable estate:  

• Charitable remainder trusts provide income while reducing estate size.  
• Generation-skipping trusts transfer assets to grandchildren, potentially reducing estate taxes.
• Grantor retained annuity trusts (GRATs) transfer appreciation to heirs.  

Lifetime gifting strategies  

The annual gift tax exclusion allows tax-free transfers:

• 2024 limit: $18,000 per recipient per year  
• 2024 Married couples: Can give $36,000 per recipient annually  
• Strategic gifting reduces estate size over time  

Spousal transfers and portability  

Unlimited spousal exemption allows tax-free transfers between spouses. Portability lets surviving spouses use their deceased spouse's unused exemption, but requires filing IRS Form 706.  

Work with estate planning professionals  

Estate tax planning requires specialized knowledge. Professional tax advisors can:  

• Analyze your specific situation  
• Implement tax-saving strategies  
• Ensure compliance with changing laws  
• Coordinate state and federal requirements  

In addition to working with advisors, we recommend seeking help from a lawyer who is knowledgeable in estate planning issues. LegalShield provider lawyers are able to assist at a fraction of other lawyers’ hourly fees, making a LegalShield Membership a valuable option.  

Estate tax and your family's inheritance  

Understanding how estate taxes impact what your family inherits is key to protecting assets and avoiding surprises during the estate settlement process.

What heirs should know about estate taxes

Key points for heirs:  

• Federal and state estate tax is paid by the estate, not individual heirs.  
• State inheritance taxes may apply to specific heirs.  
• Estate taxes reduce the total amount available for distribution.  
• Proper planning can preserve more wealth for beneficiaries.  

Coordinating with life insurance and beneficiary designations  

Life insurance strategies:  

• Policies can provide liquidity to pay estate taxes.  
• Irrevocable life insurance trusts (ILITs) keep policies outside the taxable estate.  
• Direct beneficiary transfers bypass probate and may avoid estate taxes.  

Beneficiary designations on retirement accounts and insurance policies transfer assets directly to heirs, potentially avoiding estate taxes.  

Estate tax doesn't have to be confusing  

While federal estate tax only affects large estates, understanding the basics benefits everyone. How much is death tax? For most families, the answer is zero due to high exemption thresholds. However, proper planning ensures you're prepared regardless of how your estate grows.  

Key takeaways:  

• Federal estate taxes only affect estates exceeding $13.61 million (2024)  
• State estate taxes may apply with lower thresholds  
• Strategic planning can minimize tax obligations  
• Professional guidance is essential for complex estates  

With good planning, estate taxes can be minimized and your legacy protected for future generations.  

Get professional help with estate planning  

Estate planning involves complex legal and tax considerations that require professional expertise. LegalShield offers an affordable solution for families seeking comprehensive estate planning assistance.  

With a LegalShield Membership, you get:

• Access to experienced attorneys for consultation and advice on estate planning
• Lawyer-drafted documents including Last Will & Testament, Living Will, and Power of Attorney  
• Annual document reviews and updates to keep your estate plan current  
• Unlimited consultations on estate planning questions  
• Discounted rates for additional estate planning services  

LegalShield's personal and family plans start at just $26.95 per month when billed annually, making professional estate planning accessible and affordable. Don't let estate tax complexity overwhelm you—get the professional guidance you need to protect your family's future.

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Written by Elyse Dillard, Content Specialist at LegalShield. Elyse creates educational resources about legal and identity theft protection services. She works to make complex legal concepts more accessible to readers and has contributed to numerous articles on the LegalShield blog.

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