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What Is Estate Tax?

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A tax on the transfer of property and other assets after a person’s death, usually only for estates worth millions of dollars.

The estate tax is a tax on the transfer of property and other assets after a person’s death. You may also see it called the estate transfer tax or death tax. If the total value of your estate — the collection of everything you own — is above a certain amount, the IRS levies a tax on it before any assets can be passed on to a beneficiary.

The first $12.06 million of your estate is exempt from taxation if you die in 2022. This is known as the federal estate tax exemption. In California, there is no separate state estate tax.

Key Takeaways

  • Federal estate tax is generally due if an estate is worth more than $12.06 million for people who die in 2022

  • Your estate won’t be taxed if it’s transferred to your surviving spouse

  • You can decrease the value of your estate by giving away assets to others, making charitable contributions, or using an irrevocable trust

  • CA has no separate estate tax

The person who handles all of the tax bills on behalf of an estate is the executor. Many people name an executor in their will, but a court appoints someone to do the job if there is no will. Keep in mind that the executor doesn’t have to pay the tax — the tax comes out of the estate’s assets.

If you’re looking to avoid estate tax or reduce your estate tax liability, you may need to reduce the value of your estate. Possible options are giving away assets before you die or moving assets you own into an irrevocable trust. You can also transfer your estate tax-free to a surviving spouse, but then your spouse may owe estate tax when they die.

Who has to pay estate tax?

Federal estate tax is due if an estate’s value exceeds the estate tax exemption amount, which is $12.06 million for deaths in 2022. The estate tax exemption is also called the estate tax exclusion.

Federal estate tax exemption by year

Tax year Exemption amount
2022 $12.06 million
2021 $11.70 million
2020 $11.58 million
2019 $11.40 million
2018 $11.18 million
2017 $5.49 million

An individual estate may have a lower exemption than the federal amount, though, because an estate’s actual exemption is calculated as the federal exemption minus any money and assets the owner gifted to others during their life. If you gift $700,000 to your children during your life (and report it on your taxes) then the IRS will calculate your estate’s exemption as only $11.3 million when you pass away, if you pass away in 2022.

Additionally, estate tax only applies to a taxable estate. The taxable estate is calculated as the value of the gross estate — the total, fair market value of all its assets — minus certain deductions, like the value of mortgages, debts, and any assets that go to a surviving spouse or qualified charity.

The estate tax exemption nearly doubled in 2018 because of the Tax Cuts and Jobs Act, but the exemption could revert back to its previous level in 2025.

Estate tax rates

The federal estate tax has marginal tax brackets that range from approximately 18% to 40% . With marginal rates, you only pay a certain tax rate on the money that falls within the bracket.   An example of the marginal tax rates are below:

Federal estate tax rates

Taxable estate value above the exemption Tax rate Total maximum tax
$0 to $10,000 18% $1,800
$10,000 to $20,000 20% $3,800
$20,000 to $40,000 22% $8,200
$40,000 to $60,000 24% $13,000
$60,000 to $80,000 26% $18,200
$80,000 to $100,000 28% $23,800
$100,000 to $150,000 30% $38,800
$150,000 to $250,000 32% $70,800
$250,000 to $500,000 34% $155,800
$500,000 to $750,000 37% $248,300
$750,000 to $1 million 39% $345,800
$1 million+ 40% $345,800 + 40 cents per dollar over $1 million

Talk to a local estate planning attorney to create a plan that minimizes taxes and maximizes the inheritance for your heirs.

How to avoid estate tax

There are only a handful of ways to avoid paying estate tax:

  • Decrease the value of your estate, either by gifting assetsmaking charitable donations, or moving assets into an irrevocable trust (like an asset protection trust).

  • Use the marital deduction to pass your estate to your spouse, tax free.

  • Ultimately, your estate will have to pay tax if it’s worth more than the exemption. However, a well-crafted estate plan may help you retain your wealth and reduce your estate tax liability. Learn more in our guide to estate planning.

Decreasing estate value through gifts

Gifting assets is one way to decrease the value of your estate, and it still allows you to transfer assets to your intended recipients. However, you may need to pay gift tax if the assets you gift in a single year are worth more than $16,000 (annual gift excluson amount which can annually adjust) to any one person, or if the value of your lifetime gifts exceeds the estate tax exemption.

Decreasing estate value through charitable donations

Charitable donations are a popular way to reduce your estate’s value, but how much you can donate in a given year may be limited to 50% of your adjusted gross income. Our guide to charitable tax deductions will help you learn more. If you want to donate a significant amount, another option may be to create a charitable trust. The structure of some charitable trusts also help create income for your beneficiaries either before or after your death.

Decreasing estate value through trusts

You can decrease your estate value by moving assets into an irrevocable trust. An irrevocable trust is a separate legal entity and any assets you transfer into the trust will belong to it instead of you in the eyes of the IRS. Setting up your trust as a credit-shelter trust could be particularly useful because it allows your surviving spouse to access the money from your estate without adding to the value of their own estate.

Related article: How do trusts work?

Passing an estate to your spouse

The marital deduction allows someone to transfer unlimited assets to their spouse — before or after death — without having to pay tax on the transfers. So any estate transferred to a surviving spouse won’t owe estate tax.

U.S. tax law also allows for a portability election, which allows a surviving spouse to take the unused lifetime exemption from their deceased spouse and add it to their lifetime exemption. If both spouses had a remaining lifetime exemption of $10 million when one spouse died, the surviving spouse could increase their own exemption to $20 million. However, the surviving spouse still needs to pay estate tax if they die with an estate worth more than their exemption. (Consider a trust, as explained in the previous section.)

An estate must file Form 706 to use the portability election, so a surviving spouse may want (the executor) to file federal estate tax forms even if no estate taxes are owed. Talk with a financial advisor if you’re unsure whether to file an estate tax return.

Estate tax vs inheritance tax

Estate tax is paid by an estate before assets are passed on. There is no inheritance tax at the federal level, but certain states (not CA) do collect an inheritance tax.