How Estate Taxes Work
When someone passes away, their estate may be subject to the estate tax depending on its value. We explain how it works in this guide.
Sean Canonica
Senior Finance Writer
Sean is a finance writer and content strategist for ComparisonAdviser. He has over three years of experience writing about various topics, such as insurance, financial advisors, and investing. Additionally, he is a co-founder and the CEO of RateSonic, an online insurance resource. Sean values helping readers understand difficult topics by creating easy-to-read and thorough content.
View ProfileOnce someone passes away, everything they own must be distributed. However, one’s assets may be subject to state and federal estate taxes depending on the value of the estate. State jurisdictions also play a role in the taxability of one’s wealth after death.
While taxes can be a thorn in your side as you plan your estate, there are ways you can lessen the burden on your friends and family. In this article, we’ll give you an overview of how taxes on estates work, including the various types. Then, you’ll learn about the common strategies professionals use to help minimize the amount owed. We’ll also break down the types of experts who can help you, including credentials to look out for.
Key Takeaways
- As of 2024, an estate only needs to pay federal taxes if its value is more than $13.61 million.
- Once the federal threshold is hit, the tax rate starts at 18% and tops out at 40% if an estate’s value is more than $1,000,000 over the initial limit.
- An estate may also owe state taxes, which come with unique rates and exemption limits. Currently, 13 states charge an estate tax.
- There are several ways to reduce the estate tax burden, such as establishing a trust, giving gifts, or donating to charity.
Understanding Estate Taxes
Estate taxes are what your estate will owe to the state and federal government as your assets are distributed. The exact amount your loved ones will need to pay depends largely on the value of your holdings and belongings, minus any deductions. Most won’t need to pay taxes due to jurisdiction asset value thresholds.
Each estate is taxed at a varying rate, depending on its value. The maximum federal rate for asset transfers is 40%. Total value is dependent on the fair market value (FMV) of all assets and belongings within it. This is the value of an item today, not as it was when it was first purchased.
While value largely determines whether your estate must pay, there are exceptions. If you bequeath belongings and assets to a surviving spouse, they won’t owe anything to the government due to the unlimited marital deduction. However, at the time of their death, their estate will still be subject to taxes.
Federal Estate Tax
Your estate will owe taxes to the federal government if its value exceeds $13.61 million for 2024 or $12.92 million for 2023. For most, this won’t ever apply. However, for entities worth above the exemption limit, you will owe a percentage to the Internal Revenue Service (IRS). As mentioned above, estate value comes from the FMV of all assets and belongings you (or the person who passed) own.
Federal tax rates span from 18% to 40%, depending on the value of the estate. The percentage rises incrementally, then tops out if it’s worth $1 million or more than $13.61 million. Below is a table to help you visualize this system:
| Tax Rate | Taxable Amount | Amount Owed |
|---|---|---|
| 18% | $0-$10,000 | 18% of the taxable amount |
| 20% | $10,001-$20,000 | 20% of the taxable amount, plus $1,800 |
| 22% | $20,001-$40,000 | 22% of the taxable amount, plus $3,800 |
| 24% | $40,001-$60,000 | 24% of the taxable amount, plus $8,200 |
| 26% | $60,001-$80-000 | 26% of the taxable amount, plus $13,000 |
| 28% | $80,001-$100,000 | 28% of the taxable amount, plus $18,200 |
| 30% | $100,001-$150,000 | 30% of the taxable amount, plus $23,800 |
| 32% | $150,001-$250-000 | 32% of the taxable amount, plus $38,800 |
| 34% | $250,001-$500-000 | 34% of the taxable amount, plus $70,800 |
| 36% | $500,001-$750,000 | 36% of the taxable amount, plus $155,800 |
| 38% | $750,001-$1,000,000 | 38% of the taxable amount, plus $248,300 |
| 40% | $1,000,001+ | 40% of the taxable amount, plus $345,800 |
The federal estate tax can be steep if it applies to you, however, there are ways you can minimize what you owe. Deductions and credits, such as the unlimited marital deduction or unified credit, can help you or your beneficiaries save money.
State Estate Tax
Depending on where you live, a state estate tax may apply to you. 13 states impose taxes on asset transfers if their value reaches a certain threshold. Exemption thresholds are typically lower for states. However, each is a unique entity and, as such, has varying rules and requirements.
In the table below, we list each state that requires the estate tax and its exemption requirements as of 2023:
| State | Exemption Requirement |
|---|---|
| Connecticut | $12,920,000 |
| District of Columbia | $675,000 |
| Hawaii | $5,490,000 |
| Illinois | $4,000,000 |
| Maine | $6,800,000 |
| Massachusetts | $2,000,000 |
| Maryland | $5,000,000 |
| New York | $6,940,000 |
| Oregon | $1,000,000 |
| Minnesota | $3,000,000 |
| Rhode Island | $1,774,584 |
| Vermont | $5,000,000 |
| Washington | $2,193,000 |
Like the federal estate tax, state rates are progressive. This means that the more valuable an estate is, the more you must pay. Keep in mind that each state has varying rates, so be sure to check with each to see what you need to pay.
Difference Between Inheritance and Estate Tax
The estate and inheritance tax are both very similar; however, there are key differences. Jeff Rose, CFP, and founder of GoodFinancialCents, explains that the “estate tax is like a toll booth” that the “estate must pass through before it goes to the heirs.” Conversely, he describes the latter as being “like a ticket that individual heirs have to pay on what they inherit.”
To recap, the estate tax is a cost that state and federal governments charge against the entirety of the assets beneficiaries receive. Meanwhile, individual heirs must pay an inheritance tax. Rose points out that the latter is a “bit less common” because most states don’t impose it.
The following states levy an inheritance tax:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
How to Pay Less
For most people, the estate tax won’t ever apply. But for those who aren’t exempt, the costs can be quite expensive. In this case, it’s a good idea to look for ways you can minimize the amount you owe. Here are the most common strategies to do so:
- Gifts. According to CFP Jeff Rose, “gifting some of your assets while you’re still around” is a shrewd way to avoid taxes. This is because you lessen the size of your estate and are preemptively handing property (or belongings) over so the government can’t take a slice.
- Donating to charity ahead of time can lower the size of your estate. This, naturally, means you’ll end up paying less or potentially even help you avoid estate taxes altogether.
- Trusts. Setting up an irrevocable trust for an heir can also allow you to minimize estate taxes. This is because you’re essentially handing over assets within it without being able to take it back.
- Deductions are a smart way to pay less on taxes. If you donate to charity or pass your assets on to a surviving spouse, you can waive some of what you owe.
Minimizing your tax burden can seem like a challenge. However, it’s all about “reducing the size of the estate,” according to Rose. We recommend you consult with a tax or financial advisor to help plan ahead, so your beneficiaries won’t have to pay as much.
How a Financial Advisor Can Help
It’s a good idea to work with a professional as you plan your estate. They’ll be able to help you draft a will, assign beneficiaries, and minimize or avoid taxes. However, there are many different types of advisors you can choose from to help you here.
Jeff Rose, CFP, recommends seeking out “estate planners or tax advisors” if you need help minimizing or dealing with taxes. “These experts are like your financial GPS, directing you clearly and efficiently to strategies where you can potentially save a substantial amount of money,” says Rose. These professionals may be certified financial planners (CFPs) or tax experts, such as certified public accountants (CPAs).
If you need help finding a financial advisor, we recommend using this free matching tool. Upon filling out a short quiz, it’ll pair you with a reputable professional near you.
Frequently Asked Questions
When do I have to pay estate taxes?
You must pay taxes if the value of the estate is worth more than the federal exemption threshold, which is $12.92 million as of 2023. Additionally, you’ll need to pay state taxes if you live in one of 13 states that levy it.
What is the most you can inherit without paying taxes?
Most people should probably be on a budget of some sort. It’s smart to keep track of your money so that you can worry less about it. People who view their finances as a pain point or source of stress in their lives should be paying attention to their spending habits.
Is it better to receive property or inherit it as a gift?
According to Rose, “this one’s a bit tricky because it depends on the specifics” of your situation. He adds that “getting property as a gift while the person is still alive can sometimes have gift tax implications.” On the flip side, he says that “inheriting property often comes with a step-up in basis, which can be a big help when it comes to capital gains tax if you decide to sell later on.” Before you decide, be sure to speak with a financial advisor or tax expert to see which strategy is most advantageous for you.
Do I have to pay taxes on a $10,000 inheritance?
If the total value of the estate you’re inheriting money from is $10,000, you won’t need to pay taxes at the state or federal levels.