The estate tax is a tax on the transfer of property and other assets after a person’s death. You may also see it called the estate transfer tax or death tax. If the total value of your estate — the collection of everything you own — is above a certain amount, the IRS levies a tax on it before any assets can be passed on to a beneficiary.
The first $12.92 million of your estate is exempt from taxation if you die in 2023 ($12.06 million for deaths in 2022). This is known as the federal estate tax exemption. Twelves states and Washington, D.C. levy their own estate taxes, all with much lower exemptions.
The person who handles all of the tax bills on behalf of an estate is the executor. Many people name an executor in their will, but a court appoints someone to do the job if there is no will. Keep in mind that the executor doesn’t have to pay the tax — the tax comes out of the estate’s assets.
If you’re looking to avoid estate tax or reduce your estate tax liability, you may need to reduce the value of your estate. Possible options are giving away assets before you die or moving assets you own into an irrevocable trust. You can also transfer your estate tax-free to a surviving spouse, but then your spouse may owe estate tax when they die. In some states, heirs also pay an inheritance tax.
Who has to pay estate tax?
Federal estate tax is due if an estate’s value exceeds the estate tax exemption amount, which is $12.92 million for deaths in 2023 (up from $12.06 million for 2022 deaths). The estate tax exemption is also called the estate tax exclusion.
Federal estate tax exemption by year
An individual estate may have a lower exemption than the federal amount, though, because an estate’s actual exemption is calculated as the federal exemption minus any money and assets the owner gifted to others during their life. If you gift $1 million to your children during your life (and report it on your taxes) then the IRS will calculate your estate’s exemption as only $11.92 million when you pass away, if you pass away in 2023.
Additionally, estate tax only applies to a taxable estate. The taxable estate is calculated as the value of the gross estate — the total, fair market value of all its assets — minus certain deductions, like the value of mortgages, debts, and any assets that go to a surviving spouse or qualified charity. (Family-owned farms also qualify for a deduction of up to $1.19 million in 2021.)
The estate tax exemption nearly doubled in 2018 because of the Tax Cuts and Jobs Act, but the exemption could revert back to its previous level in 2025.
Estate tax rates for 2021 and 2022
The federal estate tax has marginal tax brackets that range from 18% to 40% for the 2021 and 2022 tax years. With marginal rates, you only pay a certain tax rate on the money that falls within the bracket. You can see the federal estate tax rates in the table below.
Federal estate tax rates
Taxable estate value
Total maximum tax
$0 to $10,000
$10,000 to $20,000
$20,000 to $40,000
$40,000 to $60,000
$60,000 to $80,000
$80,000 to $100,000
$100,000 to $150,000
$150,000 to $250,000
$250,000 to $500,000
$500,000 to $750,000
$750,000 to $1 million
$345,800 + 40 cents per dollar over $1 million
States with an estate tax
Twelve states and the District of Columbia levy their own estate tax for 2022. All states have exclusion amounts well below the federal level. That means you may need to pay estate tax to your state, but not to the IRS. Your state tax applies in addition to any federal tax you may owe, with most states having a top tax rate of 16%.
State estate tax rates in 2022
Estate tax exemption
11.6% to 12%
District of Columbia
12% to 16%
10% to 20%
0.8% to 16%
8% to 12%
0.8% to 16%
0.8% to 16%
13% to 16%
3.06% to 16%
10% to 16%
0.8% to 16%
16% flat rate
10% to 20%
How to avoid estate tax
There are only a handful of ways to avoid paying estate tax:
Decrease the value of your estate, either by gifting assets, making charitable donations, or moving assets into an irrevocable trust (like an asset protection trust).
Use the marital deduction to pass your estate to your spouse, tax free.
If you only need to avoid state-level estate tax, moving to a state without an estate tax or with a higher exemption may be an option.
Ultimately, your estate will have to pay tax if it’s worth more than the exemption. However, a well-crafted estate plan may help you retain your wealth and reduce your estate tax liability.
Decreasing estate value through gifts
Gifting assets is one way to decrease the value of your estate, and it still allows you to transfer assets to your intended recipient. However, you may need to pay gift tax if the assets you gift in a single year are worth more than $17,000 in 2023, or if the value of your lifetime gifts exceeds the estate tax exemption.
Decreasing estate value through charitable donations
Charitable donations are a popular way to reduce your estate’s value, but how much you can donate in a given year may be limited to 50% of your adjusted gross income. Our guide to charitable tax deductions will help you learn more. If you want to donate a significant amount, another option may be to create a charitable trust. The structure of some charitable trusts also help create income for your beneficiaries either before or after your death.
Decreasing estate value through trusts
You can decrease your estate value by moving assets into an irrevocable trust. An irrevocable trust is a separate legal entity and any assets you transfer into the trust will belong to it instead of you in the eyes of the IRS. Setting up your trust as a credit-shelter trust could be particularly useful because it allows your surviving spouse to access the money from your estate without adding to the value of their own estate.
Passing an estate to your spouse
The marital deduction allows someone to transfer unlimited assets to their spouse — before or after death — without having to pay tax on the transfers. So any estate transferred to a surviving spouse won’t owe estate tax.
U.S. tax law also allows for a portability election, which allows a surviving spouse to take the unused lifetime exemption from their deceased spouse and add it to their lifetime exemption. If both spouses had a remaining lifetime exemption of $10 million when one spouse died, the surviving spouse could increase their own exemption to $20 million. However, the surviving spouse still needs to pay estate tax if they die with an estate worth more than their exemption. (Consider a trust, as explained in the previous section.)
An estate must file Form 706 to use the portability election, so a surviving spouse may want (the executor) to file federal estate tax forms even if no estate taxes are owed. Talk with a financial advisor if you’re unsure whether to file an estate tax return.
Estate tax vs inheritance tax
Estate tax is paid by an estate before assets are passed on, while inheritance tax is paid by a person after they inherit assets. Beneficiaries and heirs pay the inheritance tax. There is no inheritance tax at the federal level, but six states do collect an inheritance tax. (You may hear either estate or inheritance tax referred to as a death tax, but that’s a general term that you’re unlikely to see the IRS or other officials use.)
States with an inheritance tax
Maryland (also collects estate tax)
Surviving spouses are exempt from inheritance tax. The amount others pay will depend on the type of assets they received, the value of those assets, and the relationship between the inheritor and the decedent (deceased person). The age of the inheritor may also factor in. Direct descendants usually pay the lowest tax rates and are even exempt in certain states. Unrelated individuals usually pay the highest rates.