Death Taxes

Death Taxes

Death taxes—commonly called estate or inheritance taxes—are taxes on the transfer of assets when someone dies. They apply only to relatively large estates and vary by federal and state law.

How they work

• Estate tax: Levied on the deceased’s estate before assets are distributed to beneficiaries. The federal estate tax rate ranges from 18% to 40% on the taxable portion of an estate.
• Inheritance tax: Levied on the beneficiary who receives assets (fewer states impose this). The federal government does not impose an inheritance tax; several states do.

Key federal thresholds (for reference)
– 2023 federal exclusion: $12.92 million per individual.
– 2024 federal exclusion: $13.61 million per individual.
– The 2017 Tax Cuts and Jobs Act raised exclusion amounts through 2025; unless Congress acts, exclusion levels may drop after that.

If an estate’s value at death is below the applicable exclusion amount for that year, no federal estate tax is owed.

Important provisions

• Unified credit: Gift and estate taxes are combined into a single system. Lifetime gifts above the exclusion reduce the available exclusion for the estate and are subject to gift tax rules.
• Unlimited marital deduction: Transfers between spouses are generally tax-free for federal estate and gift tax purposes, allowing couples to defer estate tax until the surviving spouse’s death (subject to that spouse’s available exclusion).

Pros and cons

Pros
– High threshold: Only very large estates typically trigger federal estate tax.
– Revenue: Estate and gift taxes generate significant federal revenue.

Cons
– Potential double taxation: Wealth can be taxed during life (income tax) and again at death (estate tax).
– Avoidance strategies: Legal planning techniques can diminish estate tax receipts and create perceived unfairness.

Ways to reduce or avoid death taxes

Common strategies used in estate planning include:
– Irrevocable trusts: Moving assets into certain irrevocable trusts (for example, grantor retained annuity trusts—GRATs) can remove those assets from the taxable estate.
– Lifetime gifts: Making tax-free gifts up to the lifetime exclusion reduces the estate subject to tax.
– Charitable giving: Gifts to qualified charities reduce the taxable estate and may provide other tax benefits.
– Spousal planning: Using the unlimited marital deduction and portability rules to preserve exclusion amounts for the surviving spouse.
– Spending down assets: Using wealth during life to reduce estate size.

Note: These strategies have legal and tax consequences; professional advice from an estate planning attorney or tax advisor is recommended.

States with death taxes

Twelve states and the District of Columbia currently impose estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia. Separate state inheritance taxes exist in a smaller set of states.

Estate tax vs. inheritance tax

• Estate tax: Paid by the estate before distribution.
• Inheritance tax: Paid by the beneficiary who receives assets.

Bottom line

Federal death taxes affect only a small share of estates because of high exclusion amounts. Still, individuals with sizable estates should review planning options—trusts, lifetime gifts, charitable giving, and spousal strategies—to manage potential estate tax exposure and align their plans with family and philanthropic goals. Consult qualified legal and tax professionals for tailored guidance.