Estate Taxes: Federal Thresholds, Rates, and Planning Strategies

A Tax Most Americans Will Never Pay

In 2023, the IRS received estate tax returns from roughly 4,000 estates — out of approximately 3.3 million Americans who died that year. The federal estate tax, often called the "death tax," affects fewer than 0.2% of decedents. Yet for the ultra-wealthy, it can impose a 40% levy on transferred wealth. Understanding its mechanics matters both for those subject to it and for anyone tracking the ongoing political debate over its existence.

The Federal Estate Tax Exemption

The Tax Cuts and Jobs Act of 2017 nearly doubled the basic exclusion amount (BEA). For deaths occurring in 2024, the exemption is $13.61 million per individual ($27.22 million for a married couple using portability). Estates below this threshold owe no federal estate tax and need not even file Form 706.

The 2017 TCJA provisions are scheduled to sunset on December 31, 2025, unless Congress acts. Without legislation, the exemption will revert to roughly $7 million (adjusted for inflation) per individual beginning January 1, 2026 — a change that could subject significantly more estates to taxation.

How the Estate Tax Is Calculated

The taxable estate equals the gross estate minus allowable deductions. The gross estate includes all property owned at death: cash, securities, real estate, business interests, life insurance proceeds (if the decedent held incidents of ownership), and retirement accounts.

The resulting taxable estate is then reduced by the BEA (the exemption amount as a credit equivalent). Any remaining amount is taxed at rates from 18% to 40%.

The Federal Estate Tax Rate Schedule

In practice, the 40% marginal rate applies to nearly all taxable estates above the exemption, because the lower bracket amounts are trivial relative to estate sizes that exceed the multi-million-dollar threshold.

Portability of the Exemption

Portability allows a surviving spouse to use the deceased spouse's unused exclusion (DSUE). If a spouse dies in 2024 with only $6 million in their estate, the surviving spouse can carry over the unused $7.61 million of exemption — but portability is not automatic. The executor must file Form 706 within nine months of death (with a six-month extension available) to elect portability.

Key Estate Planning Strategies

• Annual gift tax exclusion — In 2024, each person can give $18,000 per recipient per year without gift tax or using the lifetime exemption. A couple can give $36,000 per recipient. Systematic gifting removes assets from the taxable estate over time.
• Irrevocable life insurance trusts (ILITs) — Life insurance held inside an ILIT is not included in the taxable estate, yet proceeds pass income-tax-free to heirs.
• Grantor retained annuity trusts (GRATs) — The grantor transfers assets to a trust and receives annuity payments for a term; any growth above the IRS hurdle rate (Section 7520 rate) passes to heirs tax-free.
• Qualified personal residence trusts (QPRTs) — The grantor's home is transferred to a trust at a reduced gift-tax value while the grantor retains the right to live there for a term of years.
• Charitable remainder trusts (CRTs) — Assets transferred to a CRT generate income to the grantor for life; the remainder passes to charity, removing it from the taxable estate and generating an immediate charitable deduction.
• Spousal Lifetime Access Trusts (SLATs) — An irrevocable trust funded by one spouse for the other, removing assets from the estate while maintaining indirect access through the beneficiary spouse.

State Estate Taxes

Twelve states and the District of Columbia impose their own estate taxes with lower exemption thresholds than the federal level. Oregon and Massachusetts, for instance, have exemptions of $1 million — meaning residents of those states can face state estate taxes on far more modest estates than those subject to federal tax. Seventeen states have no estate or inheritance tax.

The Gift-Estate Tax Unified Credit

The federal gift tax and estate tax share a single lifetime exemption — the unified credit. Taxable gifts made during life reduce the amount of exemption available at death. The IRS has confirmed it will not retroactively "claw back" gifts made under the higher TCJA exemption if the exemption drops at the 2025 sunset.

This article is for informational purposes only and does not constitute financial advice.