Federal Estate Tax
The federal estate tax applies to estates exceeding the exemption amount ($13.61 million per person in 2024, $27.22 million for married couples). Only about 0.1% of estates owe federal estate tax. Tax rates range from 18% to 40% on the amount above the exemption. A $15 million estate owes tax only on $1.39 million above the exemption, resulting in about $556,000 tax (3.7% effective rate on total estate).
The exemption is historically high due to the 2017 Tax Cuts and Jobs Act, which doubled it from $5.49 million. However, this provision sunsets after 2025, potentially dropping the exemption back to $6-7 million (adjusted for inflation) unless Congress acts. High-net-worth individuals should plan for potentially lower exemptions in the future.
Estate planning strategies can dramatically reduce or eliminate estate tax: gifting during life ($18,000 per recipient annually, $13.61 million lifetime in 2024), irrevocable life insurance trusts (ILIT), charitable remainder trusts, family limited partnerships, and grantor retained annuity trusts (GRATs). For estates near or above the exemption, working with estate planning attorneys and tax professionals is essential - the tax savings far exceed planning costs.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
No, only about 0.1% of estates (roughly 2,000 annually) owe federal estate tax due to the $13.61 million exemption. However, some states have estate or inheritance taxes with much lower exemptions ($1-5 million).
Everything you own at death: real estate, investments, business interests, life insurance proceeds (if you own the policy), retirement accounts, personal property, and gifts made within 3 years of death. Liabilities and debts are subtracted.
Estate tax is paid by the estate before distribution to heirs (federal and some states). Inheritance tax is paid by beneficiaries receiving assets (only six states). Some states have both. Most states have neither.
Annual gifting ($18,000 per person tax-free), lifetime gifting (uses exemption now before potential reduction), charitable donations, irrevocable trusts, life insurance trusts, and marital transfers (unlimited spouse transfers, doubling exemption to $27.22M).
Unless Congress extends it, the exemption drops to about $6-7 million (2017 level adjusted for inflation). High-net-worth individuals should consider using their full exemption through gifting before 2026.