Estate Tax Law

It is not uncommon to discuss estate taxes alongside inheritance taxes. Together, these are sometimes referred to as "death taxes."

An estate tax is collected directly from a deceased person's estate before distribution. By contrast, beneficiaries pay inheritance tax after receiving a distribution from an estate.

The section below provides helpful links to estate tax laws:

A person's gross estate is everything they own. As a measurement of the individual's wealth, an "estate" is analogous to their net worth (i.e., the total value of their property minus debt). Their property may include:

1. Personal property (such as vehicles or jewelry)
2. Real property (including buildings and land)
3. Intangible property (for example, bank accounts, retirement plan accounts, annuity accounts, stocks, and patents)

Large Estates

A small minority of large estates owe estate taxes when the owner dies because the estates exceed the lifetime exclusion limit. Thus, people with large estates should engage in estate tax planning. Tax planning allows them to explore estate planning tools that will help reduce tax liability.

High-net-worth individuals may also consider lifetime gifts up to the gift tax exclusion to minimize any tax liability on a gift tax return. Gifting to family members or other loved ones may also reduce tax liabilities on your income tax returns.

This article explores the basic features and background of estate taxes in the United States. It concludes with a list of fast facts that illustrate the complexity of estate tax law.

Basic Concept and Law

There is no federal inheritance tax. The Internal Revenue Code provides for an estate tax. The Internal Revenue Service (IRS) describes the estate tax as "a tax on the right to transfer property at death." There is also a federal gift tax and generation-skipping transfer tax. For more, see FindLaw's Federal 'Death Taxes' FAQ.

Large estates may face a federal estate tax rate between 18% and 40% (as of 2023) when the owner dies. However, very few estates actually need to file an estate tax return with the IRS. The federal estate tax exemption is well over $12 million. An estate is not taxable if its total value is less than this amount.

That said, estates below this value may still be required to pay state-level estate taxes. Exemptions vary according to state law. Twelve states (plus the District of Columbia) collect an estate tax as of 2023:

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Additionally, the following states collect an inheritance tax:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Connecticut is the only state that imposes a state gift tax as of 2023.

Estate Taxes: A Brief History Lesson

In one form or another, estate and inheritance taxes have existed for a long time. According to the IRS:

"Taxation of property transfers at death can be traced back to ancient Egypt as early as 700 B.C. Nearly 2,000 years ago, Roman Emperor Caesar Augustus imposed the Vicesina Hereditatium, a tax on successions and legacies to all but close relatives."

Taxation of a deceased person's property is nothing new.

In the early days of the United States, the federal government typically imposed this tax during wartime. The U.S. imposed federal death taxes four times:

• The Stamp Tax of 1797: The federal government needed to build up the Navy because of an undeclared war with France. Thus, the U.S. government sought to increase revenue by taxing federal stamps. These revenue stamps were necessary for various aspects of estate distribution (e.g., probating wills and issuing letters of administration). Once the crisis ended in 1802, the tax ended through repeal.

• The Tax Act of 1862: The Civil War's enormous price tag led to a reinstatement of federal death taxes. In addition to taxing administrative paperwork, the federal government also taxed inherited personal property. As the war raged on, the U.S. began taxing inherited real estate. Once the war ended, the taxes were phased out, ending by 1872.

• Estate Tax of 1898: The breakout of the Spanish-American War prompted Congress to revive the federal death tax. The government imposed the 1898 tax directly on estates. It was repealed in 1902.

• The Revenue Act of 1916: In need of revenue after the U.S. entered World War I, cash-strapped Congress again began taxing decedents' estates. This tax still exists today, making it the longest-lived federal death tax.

For more history, see "The Estate Tax: Ninety Years and Counting" (IRS, 2007) and "Federal Taxation of Inheritance and Wealth Transfers" (IRS, 1998).

The Estate Tax Debate

Taxing a deceased person's property has long been controversial. Through the end of the Civil War, the federal government imposed these taxes in times of national crisis. As the crisis subsided, so did death taxes.

This changed with the estate taxes introduced in 1898 and 1916. Estate taxes were largely driven by a desire to reduce wealth inequality as famous tycoons like John D. Rockefeller and Andrew Carnegie accumulated vast fortunes. But their workers often languished in poverty. Therefore, the modern estate tax sought to even out the field, in addition to funding wars.

Whether ideological, moral, or practical, many of the old arguments in this polarized debate still resonate today. One side's argument often feels like a tit-for-tat inverse of the other's. The following table explores corresponding arguments from each side.

Fast Facts: 10 Things To Know About Estate Taxes

Governing tax rules are quite complex. The following list illustrates some of the many nuances of estate tax law in the United States.

1. Very few people pay estate taxes: According to the IRS, the estates of less than 0.2% of adults who died had to pay the federal estate tax in recent years.
2. Percentage of federal revenue: According to the Congressional Budget Office, the federal estate, gift, and generation-skipping transfer taxes generally account for 1-2% of federal tax revenue annually.
3. "Pick-up taxes": These taxes are also known as "sponge taxes." These state-level taxes once allowed states to skim federal estate tax revenue. This occurs without raising individual taxpayer bills. As a result of the Economic Growth and Tax Relief Reconciliation Act (2001), these taxes were phased out entirely by 2005. This phase-out prompted a handful of states to begin taxing estates directly.
4. No estate tax in 2010: Starting in 2001, Congress began gradually phasing out the federal estate tax. By 2010, there was no estate tax at all. However, Congress reinstated the estate tax the next year. It continues today.
5. Basic Exclusion Amount (BEA): An essential component of the federal estate and gift tax exemption is the BEA. It applies first to any taxable gifts. The remainder of the BEA applies to the taxable estate. From 2018 to 2025, the BEA has been temporarily raised to approximately $11 million. In 2026, the exemption amount will revert to $5 million unless Congress steps in.
6. Deduction for married couples: The unlimited marital deduction allows a person to leave their entire estate to their surviving spouse tax-free, as long as the survivor is a U.S. citizen. The property must pass "outright" (i.e., completely) to the survivor. The survivor's estate will then be subject to federal estate tax upon their own death. For more, see FindLaw's article on The Marital Deduction Trap and How to Avoid It.
7. "Fair market value": For tax purposes, an estate's valuation is based on the "fair market value" of everything in it. The IRS provides the following open-ended definition: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."
8. Taxable estate vs. probate estate: A probate estate includes all assets titled under the decedent's name on their date of death. A taxable estate includes everything owned or controlled by the decedent on their date of death, even if they do not hold the title itself (e.g., assets in a revocable trust). The IRS makes clear that a taxable estate "will likely include non-probate as well as probate property."
9. Revocable vs. irrevocable trusts: Individuals commonly use trusts for estate and tax planning. Trusts may be revocable (changeable by the creator) or irrevocable (unchangeable by the creator). Again, because the creator retains some control over a revocable living trust, the trust assets are still part of their taxable estate.
10. Charitable Remainder Trust (CRT): One way to reduce estate taxes is to leave assets to a charity through a CRT, a type of irrevocable trust. The trust creator can receive income from the trust fund while they are alive by naming themselves as a beneficiary. Once they die, the trust assets avoid the estate tax. Further, if the charity sells the assets, the assets avoid the capital gains tax.

Have Legal Questions? An Attorney Can Help

So-called death taxes are as persistent as they are controversial. This area of tax law can be complex. You may be exploring tax planning strategies. Or you may be uncertain whether a deceased loved one's estate should file a federal estate tax return. A local tax or estate planning attorney can help with these issues or related estate planning matters.