Estate tax in the United States facts for kids

In the United States, the estate tax is a federal tax on money and property left behind when someone passes away. Think of it as a tax on the "estate" (all the things a person owns) before it goes to their family or friends. This tax applies to property given through a will or, if there's no will, according to state laws. It can also include things like money from a trust or certain life insurance payments.

The estate tax is part of a bigger system called the unified gift and estate tax. The other part, the gift tax, applies to property given away while a person is still alive.

Besides the federal government, 12 states also have an estate tax. Six states have "inheritance taxes," which are taxes paid by the person who receives money or property from an estate.

People often debate the estate tax. Some who don't like it call it the "death tax." Supporters sometimes call it the "Paris Hilton tax," suggesting it mainly affects very rich people.

Many exceptions and rules reduce how many estates actually pay this tax. For example, in 2021, only a small number of estates (2,584) paid federal estate tax. If property is left to a spouse or a recognized charity, it usually isn't taxed. Also, there's a large amount of money that can be given away or left behind without any federal tax. For instance, in 2024, this amount is $13.61 million per person. This means only the wealthiest 0.2% of estates in the U.S. typically pay this tax.

Federal Estate Tax: What It Is

Estate tax returns as a percentage of adult deaths, 1982–2008.

The federal estate tax is charged on the total value of a person's taxable estate if they were a U.S. citizen or resident when they died.

This tax can encourage very rich families to give their money directly to future generations, skipping a generation to avoid taxes on multiple transfers.

Many wealthy families plan carefully to reduce these federal taxes. However, only a small number of U.S. estates actually pay the tax because the tax-free amounts are very high. Also, money left to a surviving spouse is usually not taxed at all. But for those estates that do pay, the tax rates can be high.

To figure out the tax, you start with the "gross estate." Then, certain deductions are subtracted to get the "taxable estate."

What's in the "Gross Estate"?

The "gross estate" for federal estate tax purposes often includes more property than what's usually handled by a state's probate court. It's basically the value of all property a person owned when they died. Plus, it can include other things they didn't own at the moment of death, such as:

• Property a surviving spouse might have a right to.
• Property given away in the three years before death (unless it was a gift that wasn't taxed or sold for full value).
• Property given away before death where the person kept a "life estate" (meaning they could still use it) or certain "powers" over it.
• Property where the new owner could only get it by outliving the person who died.
• Property given away before death that could be taken back.
• Certain types of annuities (regular payments).
• Some jointly owned property, like bank accounts or homes owned with someone else, especially with spouses.
• The money from certain life insurance policies.

Life insurance money is often included in the gross estate if the benefits go to the estate, or if the person who died owned the policy or could change who gets the money. Bank accounts that are ""payable on death" or "transfer on death" are also usually included, even if they don't go through the usual probate process.

Deductions and the Taxable Estate

After figuring out the "gross estate," the law allows for different deductions. These deductions lower the value of the "taxable estate." Some common deductions include:

• Funeral and administration costs, and debts the estate owes.
• Gifts to certain charities.
• Property left to the surviving spouse.
• State inheritance or estate taxes paid (since 2005).

The most important deduction is for property left to a surviving spouse. This can often make it so a married person's estate pays no federal estate tax. However, this unlimited deduction doesn't apply if the surviving spouse is not a U.S. citizen.

How the Tax is Calculated

The tax is figured out based on the "taxable estate" plus any taxable gifts made after 1976. For people who died after 2009, the tax rates start low and go up to 40% for very large estates.

The amount of tax is then reduced by any gift tax that would have been paid on those gifts.

Tax Credits and Exemptions

There are several credits that reduce the tax, the most important being a "unified credit." This credit acts like a large "exemption" or tax-free amount for the total of the taxable estate and gifts made during life.

For example, in 2006, the tax-free amount was $2 million. This meant if an estate plus gifts totaled $2 million or less, there was no federal estate tax. This exemption has changed over the years. In 2009, it was $3.5 million. For a short time in 2010, the estate tax was even removed! But it came back.

The Tax Relief Act of 2010 changed the rules again, setting the exemption at $5 million for 2011 and 2012. It also made the exemption "portable," meaning a surviving spouse could use any unused part of their deceased spouse's exemption. For example, if a husband used $3 million of his $5 million exemption, his wife could use her own $5 million plus his remaining $2 million.

Because of these large exemptions, only the wealthiest 0.2% of estates in the U.S. end up paying any estate tax.

Who Files and When?

For estates larger than the tax-free amount, the executor (the person managing the estate) or whoever is in charge of the deceased's property must pay the tax. They also file a special form (Form 706) with the Internal Revenue Service (IRS). This form must be filed within 9 months of the person's death.

Exemption Amounts and Tax Rates Over Time

The table shows how much of an estate is tax-free each year (the "Exclusion amount") and the highest tax rate. Only the part of an estate above the exclusion amount is taxed.

For example, imagine an estate worth $3.5 million in 2006. The tax-free amount that year was $2 million. So, the taxable part was $1.5 million. In 2006, the tax rate on that amount was 46%, meaning $690,000 in taxes would be paid.

Laws have changed over time. The 2001 tax act almost got rid of the estate tax for one year (2010). But then, new laws in 2010 and 2013 brought it back, setting the exemption at $5 million (adjusted for inflation) and the top rate at 40%. The exemption amounts set by the Tax Cuts and Jobs Act of 2017 (like $11.18 million for 2018) are set to expire at the end of 2025.

Rules for Non-U.S. Citizens

The large tax-free amounts mentioned above apply mostly to U.S. citizens or residents. Non-resident aliens (people not living in the U.S. permanently) have a much smaller tax-free amount, usually $60,000. This can change if there's a special tax agreement (treaty) with their home country.

The estate tax for non-resident aliens only applies to their property located in the United States.

Noncitizen Spouses

If a person dies and their surviving spouse is not a U.S. citizen, the estate tax rules are different. All property owned together is usually counted as part of the deceased person's estate, unless the spouse can prove they contributed to buying it. Also, the unlimited tax deduction for property left to a spouse doesn't apply if the spouse isn't a U.S. citizen. The ability to "port" (transfer) an unused exemption to a surviving spouse also doesn't apply if one spouse is not a citizen.

State Estate and Inheritance Taxes

Currently, 15 states and the District of Columbia have an estate tax. Six states have an inheritance tax. Maryland has both.

In states with an inheritance tax, the tax rate depends on who receives the property and how much they get. This tax is paid by the person receiving the inheritance, not by the estate itself. For example, in Kentucky, the inheritance tax depends on how closely related the inheritor is to the person who died.

For people who died in 2014, 12 states and D.C. had only estate taxes. Their tax-free amounts varied greatly, from $675,000 to the federal amount ($5.34 million at the time). The most common amount was $1 million. Top tax rates ranged from 12% to 19%.

Five states (Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania) had only inheritance taxes. These also varied a lot. No states tax money left to surviving spouses. Only Nebraska and Pennsylvania tax money left to direct family members like children or parents. Top rates ranged from 4.5% to 18%.

Maryland is unique because it has both an estate tax and an inheritance tax. However, the estate tax paid counts as a credit against the inheritance tax, so you don't pay both in full.

Reducing Estate Taxes

Wealthy people often use strategies to reduce estate taxes. These can include:

• Giving gifts during their lifetime, which might have lower tax rates than transfers at death.
• Transferring property through special trusts.
• Giving money to charity.
• Making sure each spouse uses their full tax-free amount.
• Simply spending more of their money during their lifetime!

A 2021 study found that many of the richest Americans use special trusts to avoid estate taxes when they die.

History of Estate Taxes

Top Estate Tax Rate, 1914–2018

The U.S. has had taxes on estates or inheritances since the 1700s. A temporary tax in 1797 charged a small amount depending on the size of the inheritance. This tax was removed in 1802. Similar taxes were used to help pay for the Civil War (1862) and the Spanish-American War (1898), but they were also removed when no longer needed. The modern estate tax started in 1916.

The modern estate tax was almost completely removed by a tax law in 2001. This law slowly lowered the rates until they were gone in 2010. However, this change wasn't permanent, and the tax was set to return in 2011.

In late 2010, Congress passed a new law that set the tax at 35% for estates over $5 million for 2011 and 2012. Then, on January 1, 2013, Congress made a 40% tax permanent for estates over $5 million (adjusted for inflation).

Estate Tax and Charity

One big question about the estate tax is how it affects charitable giving. The estate tax encourages people to give to charity when they die because these gifts are tax-deductible. It also encourages giving during life. However, the tax also reduces the total amount of money wealthy people have to give away.

Studies suggest that if the estate tax were removed, charitable gifts made at death could drop by 22% to 37%. This could mean billions of dollars less for non-profit groups each year. This loss would be like losing all the money given by the 110 largest foundations in the U.S. every year.

Debate About the Estate Tax

The estate tax is often a hot topic in politics. Generally, people either oppose any tax on inheritance or believe it's a good policy.

Arguments for the Estate Tax

Supporters say that taxing large inheritances (currently over $12 million) is a fair way to fund the government. They argue that removing the estate tax would only help the very wealthy, making working people pay a bigger share of taxes.

They also point out that the estate tax only affects very large estates and has many credits that allow a big part of even large estates to avoid taxation. Supporters believe that getting rid of the estate tax would cost the federal government tens of billions of dollars each year. They argue it helps prevent wealth from staying in a few wealthy families forever and supports a system where richer people pay a higher percentage of their income in taxes.

Some supporters believe the estate tax promotes equal opportunity. They argue that wealth gives power, and it's not fair if that power comes from simply inheriting money, rather than from hard work or talent. They believe those who are privileged should contribute more to society's costs.

Winston Churchill once said that estate taxes are "a certain corrective against the development of a race of idle rich." Andrew Carnegie also believed that leaving huge wealth to children often makes them less useful and less motivated. Some research shows that older people who inherit more wealth are more likely to stop working.

Supporters also argue that the estate tax isn't a "double tax" because much of the wealth taxed (like investments that have grown in value but haven't been sold) has never been taxed before.

Economist Jared Bernstein called it the "Paris Hilton tax" because "40 percent of the nation's wealth accumulates to the top 1 percent." He argues that when these people leave huge amounts to their heirs, it's fair to tax it.

Adam Smith, a famous economist, believed that "The earth and the fulness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity." He thought that inherited wealth could discourage hard work. If estate tax revenue goes down, taxes on working people might have to go up.

Supporters also argue that if many of the wealthiest people get their money through inheritance, it can make others feel that hard work doesn't matter as much. This can lead to feelings of unfairness and even social problems.

Arguments Against the Estate Tax

Opponents of the estate tax believe it goes against the idea of individual freedom and a market economy. They argue that people shouldn't be "punished" for working hard and wanting to pass on their wealth to their children. They say families shouldn't have to deal with both a death and a tax bill on the same day.

Some argue that inherited wealth allows people, especially young people, to pursue important careers that don't pay much, like art or philosophy. They also say that in the U.S., museums and cultural places often get money from wealthy families' foundations, unlike in Europe where governments fund them more.

Other arguments against the estate tax focus on its economic effects. Some research suggests it discourages people from starting businesses. A 1994 study found that a 55% estate tax rate was like doubling an entrepreneur's income tax rate. It also costs a lot to follow the rules for the estate tax, sometimes almost as much as the tax itself.

Another argument is that the tax can make people make bad decisions about their assets. For example, it might discourage investing in a business or encourage selling it off to avoid taxes. This is especially true for farms and small businesses, which often have a lot of assets (like land and equipment) but not always a lot of cash. Farmers worry they might have to sell off parts of their farm just to pay the tax.

Opponents also argue that the estate tax can be avoided with careful planning, meaning it mostly punishes those who don't plan ahead or have less skilled advisors. They also suggest that high tax rates might encourage wealthy people to move their money out of the U.S., leading to less tax collected overall.

The Term "Death Tax"

The term "death tax" is often used to describe the estate tax. The official U.S. tax code has used the term "death taxes" since 1954 to refer to estate, inheritance, and other taxes related to someone's death.

However, calling the estate tax specifically the "death tax" became more common in the 1990s. This happened after a proposal to lower the tax-free amount was very unpopular, sparking more interest in reducing the tax. Surveys show that even poorer people often dislike inheritance and estate taxes.

Supporters of the tax say "death tax" is not precise, as it refers to all taxes related to death, not just the estate tax. Chye-Ching Huang and Nathaniel Frentz argue that calling it a "death tax" is a myth, as only a tiny fraction (0.14%) of estates actually pay it.

The term "death tax" was encouraged by groups like the National Federation of Independent Business and political pollsters like Frank Luntz, who found it created more public dislike than "inheritance tax" or "estate tax."

Related Taxes

The federal government also has a gift tax. This tax is similar to the estate tax and is meant to stop people from avoiding estate tax by giving away all their money before they die.

There are two main ways to give gifts without tax:

• You can give up to $15,000 per person per year without any gift tax (as of 2020). A married couple can give up to $30,000 per person per year.
• There's also a lifetime tax-free amount for gifts, which is the same as the estate tax exemption (for example, $13.61 million in 2024).

People often give away the maximum tax-free amount each year to reduce the size of their estate. This also lets the people receiving the gifts use the money while the giver is still alive.

There's also a generation-skipping transfer tax. This tax applies to very large transfers (over $5 million, adjusted for inflation) that skip a generation, like a grandparent giving money directly to a grandchild.

Studies show that gift taxes can affect the number of businesses, especially small ones. If it's harder for small business owners to get money to pay estate taxes without selling their businesses, it can lead to more small businesses closing.

Loopholes

Many very wealthy people avoid the estate tax by moving their money into special trusts or charitable foundations before they die.

See also

• Inheritance tax
• Wealth inequality in the United States

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  Top Estate Tax Rate, 1914–2018