Estate Tax Guide: Exemptions, Rates & Planning Strategies
How the Estate Tax Works
When someone dies, the IRS values their entire estate — real estate, investments, business interests, life insurance proceeds, retirement accounts, and other assets. After subtracting debts, funeral expenses, charitable bequests, and the marital deduction, the remaining amount is the taxable estate. If it exceeds the lifetime exemption, the excess is taxed at graduated rates up to 40%.
2024 Federal Estate Tax Rates
| Taxable Amount Over Exemption | Tax Rate |
|---|---|
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 36% |
| $750,001 – $1,000,000 | 38% |
| Over $1,000,000 | 40% |
In practice, most taxable estates pay an effective rate close to 40% because the lower brackets are consumed quickly by the amounts above the exemption.
The 2025 Exemption Sunset
The current high exemption ($13.61M per person) was set by the Tax Cuts and Jobs Act of 2017. Unless Congress acts, this exemption is scheduled to drop by roughly half on January 1, 2026 — back to approximately $7 million (adjusted for inflation). This potential change is driving significant estate planning activity right now.
Key Estate Tax Deductions
| Deduction | How It Works |
|---|---|
| Marital deduction | Unlimited transfer to a surviving U.S. citizen spouse — no estate tax |
| Charitable deduction | Bequests to qualified charities are fully deductible |
| Debts and expenses | Mortgages, funeral costs, and administrative expenses reduce the estate |
| State estate taxes paid | Deductible on the federal estate tax return |
Portability: Using Your Spouse’s Exemption
If the first spouse to die doesn’t use their full exemption, the surviving spouse can claim the unused portion — this is called portability. To elect portability, the executor must file Form 706 (estate tax return) within 9 months of death, even if no estate tax is owed. Many families skip this step and lose millions in future exemption.
Estate Tax Planning Strategies
- Lifetime gifting: Use the annual gift tax exclusion ($18,000 per recipient in 2024) to reduce your taxable estate over time
- Irrevocable trusts: Assets transferred to irrevocable trusts are removed from your estate
- Irrevocable life insurance trust (ILIT): Keeps life insurance proceeds out of the taxable estate
- Charitable remainder trusts: Provide income during life and a charitable deduction at death
- Family limited partnerships: Transfer business interests at discounted valuations
- Step-up in basis: Inherited assets receive a stepped-up cost basis, eliminating embedded capital gains
Key Takeaways
- The federal estate tax exemption is $13.61 million per person in 2024, with a top rate of 40%
- The exemption is set to drop by roughly half in 2026 unless Congress extends it
- The unlimited marital deduction defers estate tax — but doesn’t eliminate it for the surviving spouse’s estate
- Portability lets the surviving spouse use the deceased spouse’s unused exemption — but requires filing Form 706
- Lifetime gifting, irrevocable trusts, and charitable strategies can significantly reduce estate tax exposure
Frequently Asked Questions
Do most people owe estate tax?
No. With the current $13.61 million exemption, fewer than 0.1% of estates owe federal estate tax. However, the scheduled 2026 reduction and state-level estate taxes with lower thresholds could affect many more families.
What’s the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before assets are distributed. Inheritance tax is paid by the person receiving the assets. The federal government only imposes an estate tax. Six states impose inheritance taxes, and the rates vary by the beneficiary’s relationship to the deceased.
Is life insurance included in the taxable estate?
Yes, if the deceased owned the policy or had “incidents of ownership” (the right to change beneficiaries, borrow against it, etc.). An irrevocable life insurance trust (ILIT) removes the proceeds from the estate. The policy must be transferred to the trust at least 3 years before death.
How does the step-up in basis work for inherited assets?
When you inherit an asset, your cost basis “steps up” to the fair market value on the date of death. This eliminates all unrealized capital gains that accrued during the decedent’s lifetime. It’s one of the most powerful tax benefits in the code and a key consideration in estate planning.
Can I avoid estate tax by giving everything away before death?
Not entirely. Lifetime gifts over the annual exclusion ($18,000 per recipient) use up your lifetime estate/gift tax exemption — it’s a unified system. However, strategic gifting of appreciating assets can shift future growth out of your estate, which is a powerful planning tool.