Estate Tax Basics: Who Actually Pays It

The federal estate tax applies to a tiny fraction of estates because the exemption is so large. But the rules around it, especially at the state level and for married couples, are worth understanding before assuming it will never touch you.

How the federal estate tax works

When someone dies, the value of everything they own (property, investments, life insurance, business interests) makes up their gross estate. Only the amount above the federal exemption, which is in the millions of dollars per person, is taxed, and the top rate is steep at 40%. Because the exemption is so high, the large majority of estates owe nothing federally.

The unlimited marital deduction

Anything you leave to a US-citizen spouse passes free of estate tax, no matter the amount. This defers the tax until the second spouse dies. With proper planning, couples can also combine their two exemptions (called portability) to shield roughly double before any tax applies.

Don't forget state estate and inheritance taxes

Several states levy their own estate or inheritance taxes, often with far lower exemptions than the federal one. An estate that owes nothing to the IRS can still owe a meaningful amount to the state. Where you live (and where you own property) matters a great deal here.

Common ways to reduce exposure

Families above the threshold use tools like annual gifting (moving money out over time), irrevocable trusts, and life insurance held in a trust so the payout falls outside the taxable estate. These are advanced strategies that call for an estate attorney, not a DIY approach.

The scheduled change to watch

The federal exemption amount is set by law and can change with legislation, sometimes dropping significantly on a scheduled date. If your estate is anywhere near the threshold, keep an eye on the current figure, because planning that works today may need revisiting.

Estimate potential exposure with our estate tax calculator.