Explore how estate taxes can affect your legacy. Understand exemptions, state levies, and planning strategies for minimizing taxation.
Estate tax: What it is, how it works, and who pays
Here’s what you need to know about estate taxes:
- The federal estate tax applies to estates exceeding $15 million, with rates up to 40% in 2026.
- Some states also impose their own estate or inheritance taxes, which can affect your heirs even if your estate is not subject to federal tax.
- Assets like real estate, investments, and business interests are typically included in your taxable estate.
- Careful planning can help reduce or avoid estate taxes.
- Understanding the differences between estate, gift, and generation-skipping transfer taxes is key to effective wealth transfer planning.
What is an estate tax?
The estate tax is a tax on the transfer of property and assets from a decedent’s estate to their heirs. It’s assessed on the total value of the estate before assets are distributed to beneficiaries.
How estate tax works
Calculating estate tax involves several steps. Here’s how the process typically works:
What assets are included in an estate?
These assets are typically included when calculating your estate for tax purposes:
- Real estate: Homes, vacation properties, and land.
- Investments: Stocks, bonds, mutual funds, and retirement accounts.
- Life insurance: Proceeds from policies you own individually or with a spouse.
- Business interests: Ownership in privately held businesses or partnerships.
- Personal property: Cars, jewelry, art, and collectibles.
Who pays estate tax?
The estate itself is responsible for paying any estate tax due before assets are distributed to heirs. The executor or personal representative of the estate handles the filing and payment. Beneficiaries generally don’t pay estate tax directly but may be responsible for state inheritance taxes depending on where they live.
When do you have to pay estate tax?
Estate tax returns (IRS Form 706) are due nine months after the date of death. Payment of any federal estate tax owed is also due at that time. State deadlines may vary, so it’s important to check local requirements.
Help maximize your legacy’s impact
Taxes on wealth transfer
When estate planning, there are three distinct but related federal taxes you and your heirs should be aware of: estate tax, gift tax, and generation-skipping transfer (GST) tax. The same tax rate is in effect for all three (up to 40% in 2026). In addition, certain states impose their own transfer taxes.
*Scheduled to be adjusted annually for inflation
Federal estate tax
The federal estate tax may be imposed on the value of your taxable estate. This is the total value of assets remaining in your estate after your exemption amount and any eligible deductions have been subtracted. Assets that pass directly to your spouse (if they’re a U.S. citizen) or a qualified charity are also excluded.
What is the estate tax exemption?
The estate tax exemption is the amount you can transfer at death without owing federal estate tax. For 2026, the exemption is $15 million per individual, adjusted annually for inflation. Married couples can potentially double this amount through portability, allowing a surviving spouse to use any unused exemption from their spouse.
What’s an exemption amount?
U.S. citizens are entitled to transfer a certain amount of money free of federal estate and gift taxes. In 2026, the exemption amount for U.S. citizens is $15 million, adjusted for inflation annually.
This amount is “unified,” meaning it applies to gifts during your lifetime and amounts you bequeath after you are gone.
For example, your estate can use any portion of your exemption amount not used during your lifetime for gift tax exemptions. However, if you have already used up your exemption amount by the time you pass away, your entire estate may be subject to estate tax.
Exceptions that benefit spouses
If you’re married, it’s important to know about the special rules for spouses that can reduce the size of your taxable estate and enable you to transfer any unused portion of your exemption amount.
Federal gift tax
The federal gift tax is imposed when you make gifts during your lifetime that total more than the exemption amount.
However, certain gifts don't count against your exemption amount. You can transfer up to $19,000 in 2026 ($38,000 for married couples) to an unlimited number of people each year without incurring gift tax. You can also give unlimited gifts to your spouse as long as they are a U.S. citizen (separate rules apply for noncitizen spouses).
In addition, you can contribute to qualified charitable organizations and pay medical or tuition expenses for any person (as long as your payments are made directly to the medical provider or educational institution).
Generation-skipping transfer tax
The generation-skipping transfer (GST) tax may be due, in addition to the estate or gift tax, when you transfer assets to someone who is two or more generations from you. If the beneficiary isn’t related to you, the tax may be imposed if that person is more than 37½ years younger than you.
For example, the GST tax may apply when:
- A grandparent makes a direct gift to a grandchild.
- A grandparent sets up a trust for a grandchild while the grandchild’s parents are still alive.
Like the estate and gift taxes, the GST tax has an exemption amount ($15 million in 2026), so consult with your tax advisor before making gifts to younger generations.
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State estate and inheritance taxes
Depending on where you live, your estate or beneficiaries may have to pay a state gift tax, estate tax, inheritance tax, or a combination of these. State estate taxes are levied on your assets before they are distributed to your beneficiaries, with rates ranging from 0.8% to 35%.
States that currently impose an estate tax include:
- Connecticut.
- District of Columbia.
- Hawaii.
- Illinois.
- Maine.
- Maryland.
- Massachusetts.
- Minnesota.
- New York.
- Oregon.
- Rhode Island.
- Vermont.
- Washington.
Inheritance tax rates range from 0% to 16%. These rates may be progressive and are determined by the amount of property received by the beneficiaries and their relationship to you. Direct descendants, for example, may pay one rate, while beneficiaries who are more distantly related to you may pay a higher rate.
State estate and inheritance taxes are generally deductible on your federal estate tax return.
Estate tax vs. inheritance tax
Estate tax and inheritance tax are often confused, but they are different. Here’s a comparison:
| Feature | Estate tax | Inheritance tax |
| Who pays it | The estate (before assets are distributed) | The beneficiary (after receiving assets) |
| When it’s applied | At the time of death, before distribution | After assets are distributed to heirs |
| Where it’s applicable | Federal and some states. | Only in a few states (for example, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) |
How to reduce estate taxes
There are several strategies that can help reduce or avoid estate taxes. Here are some common approaches:
- Gifting: Make annual gifts within the IRS exclusion limits to help reduce your taxable estate over time.
- Trusts: Use irrevocable trusts to remove assets from your estate and potentially shield them from estate tax.
- Charitable giving: Support causes you care about by donating directly to qualified charities.
- Spousal transfers: Take advantage of the unlimited marital deduction for transfers to a U.S. citizen spouse.
- Professional guidance: Work with an estate planning attorney or tax advisor to tailor strategies to your situation.