The Complete Inheritance and Estate Tax Guide — Rates, Exemptions, and Planning Strategies

What Is an Estate Tax?

An estate tax is levied on the total value of a deceased person’s estate before it is distributed to heirs. An inheritance tax, used in some US states, is paid by the recipient rather than the estate.

Estate and inheritance taxes are not just “taxes on passing wealth down.” With the right planning, substantial exemptions and deductions are available — which is why a strategic approach matters.

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Federal Estate Tax Rates (United States)

The federal estate tax applies only to estates exceeding the exemption threshold.

Federal estate tax exemption (2024): **$13.61 million per individual** ($27.22 million for married couples with proper planning). Estates below this threshold owe no federal estate tax.

For taxable estates, the rates are:

Taxable Estate (above exemption)	Rate
Up to $10,000	18%
$10,001 –$20,000	20%
$20,001 –$40,000	22%
… (progressive brackets)	…
Over $1,000,000	40%

Important note: the 2017 Tax Cuts and Jobs Act doubled the exemption, but these higher thresholds are currently set to expire after 2025. If Congress doesn’t act, the exemption will revert to approximately $7 million per person (inflation-adjusted). Estate planning done now can lock in today’s higher exemption.

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How the Estate Is Calculated

Gross Estate (all assets owned at death)
+ Gifts made within 3 years of death (some exceptions apply)
+ Life insurance proceeds (if estate-owned)
= Gross Estate

Gross Estate
− Debts, mortgages, and funeral expenses
= Adjusted Gross Estate

Adjusted Gross Estate
− Deductions (marital deduction, charitable deduction, etc.)
= Taxable Estate

Taxable Estate
− Applicable Exemption ($13.61M in 2024)
= Amount Subject to Tax

Amount Subject to Tax × Rate
= Estate Tax Due

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Key Deductions and Exemptions

Maximizing deductions is the foundation of estate tax planning.

1. The Unlimited Marital Deduction

Assets transferred to a US citizen spouse — whether during life or at death — are fully exempt from estate and gift tax. This is one of the most powerful provisions in the tax code.

Important caveat: this only defers the tax. When the surviving spouse eventually dies, their estate will be taxed. Proper planning (e.g., portability elections, bypass trusts) prevents the second death from triggering a large bill.

2. Portability

A surviving spouse can inherit the deceased spouse’s unused exemption amount (DSUE). To claim it, an estate tax return must be filed within 5 years of death, even if no tax is owed.

Example: Husband dies with a $10M estate, using$10M of his $13.61M exemption. The remaining$3.61M is portable to his wife, giving her a combined exemption of $17.22M.

3. The Annual Gift Tax Exclusion

You can give **$18,000 per recipient per year** (2024) completely free of gift and estate tax. A married couple can give$36,000 to any one person.

Used consistently over decades, this is one of the most effective wealth transfer tools available.

4. Stepped-Up Basis

Assets inherited at death receive a stepped-up cost basis to fair market value at the date of death. If your heirs sell inherited assets, they only owe capital gains tax on appreciation since the date of inheritance — not the original purchase price.

Example: You bought stock for $50,000 that is worth$500,000 at your death. Your heir’s basis is $500,000. If they sell immediately, they owe no capital gains tax on the$450,000 gain.

5. Charitable Deductions

Assets donated to qualifying charities at death are fully deductible from the estate. Charitable remainder trusts and donor-advised funds allow you to benefit charity while also reducing the taxable estate during life.

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State Inheritance and Estate Taxes

Twelve states plus Washington D.C. impose their own estate taxes, often with much lower exemption thresholds than the federal level (some as low as $1 million). Six states have an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania).

If you live in or own property in one of these states, state-level planning is as important as federal planning.

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Gifting Strategies During Life

Transferring assets before death can reduce your taxable estate, but tax law has safeguards.

Annual exclusion gifts: $18,000 per recipient per year (2024) — zero tax impact and not reported.

Direct payment of tuition and medical expenses: payments made directly to an educational institution or medical provider are excluded from gift tax entirely — no limit.

529 college savings plans: you can front-load 5 years of annual exclusion gifts into a 529 plan at once ($90,000 per beneficiary in 2024).

Irrevocable trusts: assets placed in certain irrevocable trusts (ILITs, GRATs, SLATs) can be removed from your taxable estate while still benefiting your family.

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Filing and Payment

Filing deadline: the federal estate tax return (Form 706) is due 9 months after the date of death, with a 6-month extension available.

Payment options:

• Lump sum: full cash payment at filing
• Installment payments: for estates with significant business or farm assets, tax may be paid in installments over up to 14 years at a favorable interest rate (IRC Section 6166)

Paying with assets: in limited circumstances, the IRS accepts certain US Treasury bonds (“flower bonds”) or, through a special election, other assets in lieu of cash.

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Planning Strategies

1. Start Gifting Early

Consistent annual exclusion gifts, started in your 40s or earlier, can remove substantial wealth from your taxable estate over time. By the time gifts are made 3+ years before death, they are fully outside the estate.

2. Maximize the Marital Deduction — But Plan the Second Death

Assets left to a spouse pass tax-free, but the surviving spouse’s estate will eventually be taxed. A credit shelter (bypass) trust or portability election can ensure both spouses’ exemptions are fully used.

3. Utilize the Stepped-Up Basis

In some cases, it’s better to hold appreciated assets until death (where heirs get a stepped-up basis) rather than sell during life and trigger capital gains. Your estate planner can model this.

4. Consider an Irrevocable Life Insurance Trust (ILIT)

Life insurance death benefits are included in your estate if you own the policy. Holding the policy in an ILIT removes it from your estate while still directing the proceeds to your beneficiaries.

5. Work with an Estate Planning Attorney

Estate planning is highly individualized — the right strategy depends on your asset mix, family structure, state of residence, and goals. An estate planning attorney and CPA working together can model scenarios and implement the most effective plan.