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What Is an Estate Tax?
Let me explain what an estate tax really is. It's a federal tax imposed on the transfer of a deceased person's estate, and it kicks in only when the estate's value surpasses a legal exclusion limit. You pay tax solely on the portion that goes over that threshold.
This tax gets assessed by the federal government and, in some cases, by state governments too. We base it on the estate's fair market value at the time of death, not what the deceased originally paid for the assets. The federal government handles its part, and if the state where the person lived has an estate tax, that applies as well.
Key Takeaways
Here's what you need to know upfront: the estate tax is a levy on an estate's current asset value. For federal purposes, it applies to assets over $13.61 million in 2024 and over $13.99 million in 2025. You get an exemption for transfers to spouses, but recipients might face inheritance taxes on what they receive.
How Federal Estate Taxes Work
The IRS mandates that estates with combined gross assets and prior taxable gifts over $13.61 million for 2024 or $13.99 million for 2025 must file a federal estate tax return and pay up. Take an estate worth $13.7 million in 2024—with the exclusion at $13.61 million, you'd owe taxes on just that $90,000 excess.
There's this unlimited marital deduction that wipes out estate tax on assets going to a surviving spouse. But when that spouse passes away, their beneficiaries could end up paying if the estate then exceeds the limit.
How State Estate Taxes Work
Even if you dodge federal estate tax, the state where the deceased lived might still tax the estate. That said, no jurisdiction taxes estates under $1 million.
Connecticut has aligned its exemption with the federal one starting in 2023. As we head into 2025, various places have their own estate taxes with specific thresholds.
Jurisdictions with Estate Taxes
- Connecticut ($13,990,000, matching federal)
- District of Columbia ($4,873,200)
- Hawaii ($5,490,000)
- Illinois ($4,000,000)
- Maine ($6,800,000)
- Maryland ($5,000,000)
- Massachusetts ($2,000,000)
- Minnesota ($3,000,000)
- New York ($7,160,000)
- Oregon ($1,000,000)
- Rhode Island ($1,802,431)
- Vermont ($5,000,000)
- Washington state ($2,193,000)
Estate Tax and Gift Tax
Since estate taxes hit after death, you can sidestep them by gifting assets while alive. But watch out—the federal gift tax applies to gifts over certain limits during your lifetime. The IRS says it counts whether you intended it as a gift or not.
For 2025, the annual gift exclusion is $19,000 per person, so you can give that much to anyone without tax. It was $18,000 in 2024. This makes gifting a smart move to avoid estate taxes for transfers to non-spouses.
If your gifts top the exclusion, they're not taxed right away and might never be unless your estate is huge. The excess gets added to your estate's taxable value at death. Say you gift $79,000 in 2024 with an $18,000 exclusion—the extra $61,000 gets reported on a 709 form, cutting your lifetime and estate tax exclusions to $13,549,000.
Fast Fact
People sometimes call the estate tax the 'death tax' because it targets a deceased individual's assets.
Estate Tax and Inheritance Tax
Estate tax applies to the estate before assets go to beneficiaries, while inheritance tax hits after inheritance and is paid by the recipient.
No federal inheritance tax exists, but six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland has both estate and inheritance taxes. The tax is based on where the beneficiary lives, depending on the inheritance value, your relation to the deceased, and local rules.
Like estate tax, inheritance tax only applies above exemptions, often on a sliding scale from single digits up to 15-20%. Your relationship affects the exemption and rate. Life insurance to a named beneficiary usually skips inheritance tax, but if payable to the estate, it might face estate tax. Closer relatives pay lower rates—spouses are exempt in all six states, and some exempt young descendants or domestic partners.
Jurisdictions with Inheritance Tax
- Iowa ($12,500, abolished effective Jan. 1, 2025)
- Kentucky ($500–$1,000)
- Maryland ($50,000–$100,000)
- Nebraska ($25,000–$100,000)
- New Jersey ($25,000)
- Pennsylvania ($3,500)
Why Estate Planning Matters
With estate tax rates being steep, if you have millions in assets to pass on, you should plan carefully to minimize what heirs pay.
When Was the Federal Estate Tax Created?
The U.S. first enacted an estate tax in 1797 to fund the Navy. It got repealed and reinstated, often for wars. The modern version started in 1916.
What Is an Estate?
An estate covers everything in an individual's net worth: land, real estate, possessions, securities, cash, and any assets they own or control.
What Deductions Help Reduce Estate Tax?
You can deduct mortgages, debts, admin expenses, losses, spousal transfers, and charity gifts. Some business or farm values get reduced for qualifying estates, plus marital deductions for married decedents and certain life estates.
The Bottom Line
In essence, the estate tax is a federal charge on a deceased person's estate based on current asset values, applying when it exceeds the exclusion limit. For 2025, file and pay if over $13.99 million in combined assets and gifts, up from $13.61 million in 2024.
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