Taxes are one of the largest potential expenses associated with your estate. Because tax laws change often, it’s important to consult with an attorney or tax professional about your specific questions. This general overview explains how estate, inheritance and gift taxes work – and how planning ahead can help reduce their impact.
Estate taxes
An estate tax is the tax collected by the state or federal government when you transfer property at the time of your death. Two terms to keep in mind regarding estate taxes are your gross estate and your taxable estate.
Gross estate vs taxable estate
Your gross estate includes the fair market value of all of your assets that you own at the time of your death. This may include:
- Cash and investment accounts
- Real estate
- Life insurance proceeds
- Trusts and annuities
- Business interests
- Personal property and other assets
Certain deductions are allowed from your gross estate, such as mortgages and other debts, estate administration expenses, assets left to a surviving spouse and qualified charitable donations. After subtracting these deductions from your gross estate, you’re left with a net taxable amount referred to as your taxable estate.
Federal and state estate taxes
Estate taxes may be assessed at both the federal and state level.
Federal estate taxes
For deaths occurring in 2026, the federal estate tax exemption is $15 million per individual, and married couples can combine their exemptions, allowing up to $30 million in assets to pass tax-free. This amount increases every year to adjust for inflation, so be sure to check with a tax attorney or accountant for the exact amount if your taxable estate is close to this value. Because the federal estate tax exemption is so high, only a small percentage of American estates have to pay estate taxes.
Amounts above the exemption rates are taxed at about 40%, although federal estate tax rates can vary. Gifts to your surviving spouse are generally exempt from federal estate taxes.
Federal estate taxes must be paid in cash, usually within nine months after you die. After the estate tax has been collected, the remainder of your estate can be distributed to your heirs.
State estate and inheritance taxes
Many states also collect estate taxes or inheritance taxes. Unlike federal estate taxes that apply only to the richest Americans, state estate and inheritance taxes can apply to those with much smaller estates.
- Estate taxes are assessed against the estate itself, regardless of who inherits the assets.
Inheritance taxes are based on who receives the assets and often depend on their relationship to the deceased.
All states exempt the surviving spouse from inheritance tax. Some states tax children of the deceased, but at a low rate. More distant relatives or people who aren’t related to the deceased are taxed at a higher rate. State tax rates commonly range from 16% to 20%, and exemption thresholds can be significantly lower than federal limits.
As with federal estate taxes, state estate and inheritance taxes generally need to be paid within nine months. Because state inheritance and estate taxes vary so dramatically by your state of residence and can change often, talk to your financial advisor or attorney about any taxes in your state.
Gift taxes
In addition to estate and inheritance taxes that affect your estate after your death, if you give someone money or property during your lifetime, you may be subject to the federal gift tax.
Annual gift tax exclusion
In 2026, the federal gift tax allows you to give away $19,000 each year to as many individuals as you’d like, without tax implications for either party. This is known as the “annual exclusion.” A married couple can give $19,000 each, for a total of $38,000 per recipient. If you give above that level, you’re likely subject to the federal gift tax rate. If you give more than the annual exclusion to one person, the excess amount typically counts against your lifetime gift and estate tax exemption, rather than triggering immediate taxes.
Other tax-free gifts
Some gifts don’t count toward the annual exclusion, including:
- Payments made directly to schools or educational institutions for tuition
- Payments made directly to medical providers for qualifying medical expenses
If you want to fund your child or grandchild’s 529 college savings plan, you can put five years of gifts in the fund at once for a total of $95,000 – assuming no other gifts are made to that child during that time.
How to reduce estate taxes
There are many ways you can reduce or eliminate your estate taxes, such as:
- Spend down your estate. The more you spend while you’re still living, the smaller your estate and the less likely you’ll have to pay estate taxes.
- Give tax-free gifts as described in the “gift taxes” section above. This lowers the value of your overall estate, thereby reducing your estate sales tax bill, and gives you the added benefit of watching your loved ones enjoy some of their inheritance while you’re still living.
- Give to a charitable trust. Charitable trusts allow you to make large gifts to tax-exempt charities, reducing the overall value of your estate.
- Open a life insurance trust. A life insurance trust allows you to subtract the value of life insurance proceeds from your estate, and therefore from your estate-tax bill.
- Consider state estate or inheritance tax rates when deciding where to live. If you have residences in two states, you may want to consider making your legal residence in a state without estate or inheritance taxes.
An estate planning attorney can help determine which strategies make sense based on your goals and financial situation.
Where you can find estate tax help
To stay ahead of the latest federal estate tax and gift tax laws, visit the IRS website or speak with an experienced estate planning attorney or financial advisor. Professional guidance can help ensure your estate plan reflects the latest tax rules and protects your loved ones.