Estate tax
Also called Death tax
A federal tax on the value of a deceased person’s estate above a high exemption amount, which most estates fall below.
What it means
The federal estate tax applies to the total value of what a person owns at death, including homes, investments, retirement accounts, business interests and life insurance they owned, minus debts, expenses and deductions. Only the portion above the exemption, an amount set by law and adjusted for inflation, is taxed, and it is paid by the estate before heirs receive their shares. Most estates owe nothing.
Transfers to a surviving spouse who is a U.S. citizen are generally unlimited and tax-free, as are gifts to charity. The estate tax is linked to the gift tax, so large lifetime gifts use up part of the same exemption. A surviving spouse can often keep the deceased spouse’s unused exemption, called portability, if an estate tax return is filed. Separately, some states levy their own estate tax or an inheritance tax paid by heirs, often with much lower thresholds than the federal one.
Example
Suppose, using a hypothetical exemption of $10 million (not the actual figure), a single person dies with a $12 million estate. Only $2 million is taxable, and at a simplified 40% rate the federal tax would be $800,000.
How it’s used
- Planning for a large estate or family business
- Deciding whether trusts or lifetime gifts are worth using
- Checking whether a state estate or inheritance tax applies
Good to know
- Exemption amounts and state rules change over time and differ by state, so people with large estates often work with an estate attorney and tax professional.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.