Who Actually Pays Estate Tax
The federal estate tax applies to estates with a gross value above the current exemption — $13.61 million per individual in 2024 ($27.22 million for married couples using portability). With this threshold, fewer than 0.2% of estates owe any federal estate tax in a typical year. The perception that estate taxes are a broad middle-class concern is largely incorrect for federal purposes.
The picture changes significantly at the state level. Twelve states and the District of Columbia levy their own estate taxes, often with substantially lower exemptions. Massachusetts and Oregon exempt only $1 million before imposing estate tax. Washington State's exemption is $2.193 million. For residents of these states with significant real estate, retirement accounts, or business interests, state estate tax planning is relevant even for households far below the federal threshold.
A critical distinction: estate tax is paid by the estate before assets are distributed to heirs. Inheritance tax, which a minority of states levy, is paid by the inheritor on assets received. Federal inheritance tax does not exist. State inheritance tax applies in Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — with rates and exemptions varying by the inheritor's relationship to the deceased.
Estimate your estate's tax exposure
Enter your estimated estate value and state of residence to see federal and state estate tax exposure and the impact of common planning strategies.
Estimate My Estate TaxHow to Calculate Your Estate's Tax Exposure
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Calculate your gross estate value
Sum all assets owned at death: primary and secondary real estate (at fair market value), retirement accounts (IRAs, 401k — included in estate at full value), taxable investment accounts, bank accounts, business interests (valued at fair market value, which requires a formal valuation for significant interests), life insurance proceeds if you own the policy, and personal property of significant value. The gross estate total is the starting point.
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Apply deductions to find the taxable estate
From gross estate subtract: the unlimited marital deduction (assets left to a U.S. citizen spouse are fully deductible — unlimited, no estate tax due regardless of size), charitable deductions (assets left to qualifying charities), outstanding debts and mortgages, and estate administration expenses. The remaining amount is the taxable estate subject to the exemption comparison.
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Apply the federal exemption
The taxable estate minus the available exemption equals the estate subject to tax. For 2024: $13.61 million exemption per individual. If your taxable estate is $15 million, the taxable excess is $1.39 million. The federal estate tax rate on the excess is a flat 40% — meaning the $1.39 million excess faces $556,000 in federal estate tax.
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Check your state's estate and inheritance tax
Look up your state's estate tax exemption and rate schedule. States with estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, DC. States with inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. Maryland uniquely has both. State rates and structures vary significantly — some use graduated rates, others flat rates.
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Model common planning strategies
For estates approaching exemption thresholds: annual gift tax exclusion ($18,000 per recipient per year in 2024 — married couples can give $36,000 per recipient) removes assets from the estate tax-free; irrevocable trusts can remove assets from the taxable estate; charitable giving reduces estate while potentially generating income during lifetime; and life insurance owned by an irrevocable life insurance trust (ILIT) provides estate liquidity outside the taxable estate.
The Step-Up in Basis: Often More Valuable Than Estate Tax Planning
Inherited assets receive a step-up in cost basis to their fair market value at the date of death. This means capital gains accrued during the deceased's lifetime are permanently eliminated for income tax purposes. A stock portfolio purchased for $200,000 worth $800,000 at death passes to heirs with a $800,000 basis — the $600,000 gain that would have been taxable if sold during the owner's lifetime is entirely forgiven.
For many middle-class families with highly appreciated assets (a home purchased decades ago, a long-held investment portfolio), the step-up in basis represents more tax savings than any estate tax planning because the estate is below the exemption threshold. Conversely, the step-up creates a planning consideration: highly appreciated assets are often better held until death rather than gifted during lifetime, since gifts carry the donor's original basis while inherited assets receive the step-up.
Frequently Asked Questions
Does a surviving spouse owe estate tax when the first spouse dies?
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Not for assets left to a U.S. citizen spouse — the unlimited marital deduction eliminates estate tax regardless of estate size. However, portability allows the surviving spouse to use the deceased spouse's unused exemption. To claim portability, the estate must file an estate tax return within 9 months of death (15 months with extension), even if no tax is owed. Failing to file forfeits the unused exemption.
Are life insurance proceeds subject to estate tax?
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Yes, if you own the policy. Life insurance death benefits are included in the insured's taxable estate if the deceased owned or had incidents of ownership over the policy. To keep large life insurance proceeds outside the estate, the policy must be owned by an Irrevocable Life Insurance Trust (ILIT) or another person — not the insured. Many high-net-worth families use ILITs specifically to provide estate liquidity without estate inclusion.
How are retirement accounts taxed in an estate?
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Retirement accounts (traditional IRA, 401k) are included in the gross estate at full value for estate tax purposes. Heirs who inherit traditional retirement accounts also owe income tax as they take distributions — creating potential double taxation. Roth IRA accounts are also included in the estate but distributions are income-tax-free to heirs. The SECURE Act requires most non-spouse beneficiaries to deplete inherited IRAs within 10 years.
What is the annual gift tax exclusion and how does it help?
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Each person can give up to $18,000 per recipient per year (2024) without gift tax or reduction in the lifetime exemption. A married couple can give $36,000 per recipient per year. With multiple children and grandchildren, annual gifting can significantly reduce a large estate over time: a couple giving $36,000 to each of 4 children and 8 grandchildren removes $432,000/year from their estate tax-free. Over 10 years, that is $4.32 million removed without any lifetime exemption usage.
Do I need an estate plan if my estate is below the exemption?
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Yes. Estate planning is not primarily about tax minimization — it is about ensuring your assets pass to the people you intend, in the way you intend, with minimum delay, expense, and family conflict. A will, durable power of attorney, healthcare directive, and beneficiary designations are essential for everyone regardless of estate size. Assets that pass through probate are public record and take 6-18 months; proper beneficiary designations and trusts bypass probate entirely.
What happens if I do not have an estate plan?
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Dying intestate (without a will) means state law determines who inherits your assets. This may not reflect your wishes — particularly for unmarried partners, blended families, or situations where you want to favor certain heirs. Without a healthcare directive, family members may face agonizing decisions about your care without guidance. Without a durable power of attorney, a court may need to appoint a guardian if you become incapacitated. The cost of proper planning (a basic estate plan is $1,000-$3,000) is trivial compared to the cost, delay, and family conflict that poor planning creates.
Estimate your estate's tax exposure
Calculate federal and state estate tax on your estimated estate value and see the impact of common planning strategies.
Estimate My Estate Tax