What is the Estate Tax
The estate tax is a federal tax on the transfer of a deceased person's assets to their heirs — but a $13.99 million exemption (2025) means it only affects the very largest estates, less than 0.2% of deaths.
The estate tax is a federal tax on the transfer of a person's taxable estate to their heirs and beneficiaries upon death. It is levied on the estate (not the heirs receiving the assets), and it applies only to the value above the federal exemption threshold. Because of the generous exemption, the estate tax is sometimes called the "death tax for the ultra-rich" — and that description is largely accurate.
The estate tax is distinct from the gift tax, though both share the same unified lifetime exemption.
2025 Federal Estate Tax Exemption and Rates
For 2025, the federal estate tax exemption is $13.99 million per individual ($27.98 million for married couples using portability). Estates below this threshold owe no federal estate tax. For estates above the exemption, the top marginal rate is 40%.
| Taxable Estate Above Exemption | Tax Rate |
|---|---|
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| ... (graduated rates) | ... |
| Over $1,000,000 | 40% |
In practice, the 40% rate is the operative figure for very large estates subject to the tax.
The Sunset Risk
The current elevated exemption ($13.99 million) was established by the Tax Cuts and Jobs Act of 2017 and is scheduled to sunset at the end of 2025, reverting to approximately $7 million (adjusted for inflation) unless Congress acts. This makes 2025 a critical year for wealthy individuals to consider large gifts and other estate planning strategies to lock in use of the elevated exemption.
What Is Included in a Taxable Estate
The gross estate generally includes:
- All property you own at death (real estate, bank accounts, investment accounts, retirement accounts, business interests)
- Life insurance proceeds if you own the policy
- Property in which you have certain retained interests or control
- Half of community property (in community property states)
Items that reduce the gross estate to reach the taxable estate:
- Debts and liabilities (mortgages, loans, taxes owed)
- Funeral expenses
- Administrative expenses of the estate
- Unlimited marital deduction (transfers to a surviving U.S. citizen spouse — completely exempt)
- Charitable bequests (completely exempt)
Portability of the Exemption
Portability allows a surviving spouse to carry over the deceased spouse's unused exemption. If a husband dies and uses only $3 million of his $13.99 million exemption, his wife can elect to add the remaining $10.99 million to her own exemption — for a total of up to $27.98 million combined. Portability must be elected on a timely filed estate tax return (Form 706), even if no estate tax is owed.
State Estate Taxes
In addition to the federal estate tax, 12 states and the District of Columbia impose their own estate taxes, typically with lower exemptions:
- Massachusetts and Oregon: $1 million exemption
- New York: ~$7.2 million (2025)
- Washington State: ~$2.2 million
Residents of these states may owe state estate tax even when their estate falls well below the federal exemption.
Estate Tax Reduction Strategies
Wealthy individuals use a variety of legal strategies to minimize estate tax:
- Annual gifts: Systematically give $19,000 per recipient per year to reduce the taxable estate over time
- Irrevocable life insurance trusts (ILITs): Keep life insurance proceeds out of the taxable estate
- Charitable remainder trusts: Reduce the estate while providing income during life
- Qualified personal residence trusts (QPRTs): Transfer a home out of the estate at a discounted gift value
- Family limited partnerships (FLPs): Transfer business interests at valuation discounts
The step-up in basis at death is an important related concept: inherited assets receive a new cost basis equal to the fair market value at death, potentially eliminating embedded capital gains.