What Is Estate Tax? Federal Limits and How to Minimize It

Estate tax is a federal tax on the transfer of wealth when someone dies. Most people will never pay it — the exemption is in the millions of dollars. But if you have significant assets, understanding how it works can help you plan ahead and protect more of your wealth for the people you leave behind.

What Is the Federal Estate Tax?

The federal estate tax applies to the total value of everything you own at the time of your death — cash, investments, real estate, business interests, retirement accounts, life insurance proceeds, and personal property. If that total exceeds the federal exemption threshold, the estate owes tax on the amount above the exemption.

As of 2026, the federal estate tax exemption is approximately $13.99 million per individual (adjusted annually for inflation). Married couples can effectively double this with proper planning, sheltering up to about $27.98 million combined.

The maximum federal estate tax rate is 40%.

Estate Tax vs. Inheritance Tax

These two taxes are often confused but are different things:

Estate tax: Paid by the estate before assets are distributed to heirs. It is based on the total value of the deceased person’s estate.
Inheritance tax: Paid by the person who receives the assets. The federal government does not impose an inheritance tax, but some states do.

States with their own estate taxes include Oregon, Massachusetts, Washington, Illinois, and several others — often with much lower exemption thresholds than the federal level. States with inheritance taxes include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Who Actually Pays the Federal Estate Tax?

Very few Americans. With an exemption near $14 million, the federal estate tax only affects a small percentage of estates — typically wealthy individuals and families. Most estates pass to heirs with no federal estate tax at all.

However, the current high exemption level is set to decrease significantly after 2025 unless Congress acts. The exemption was scheduled to revert to roughly $6–7 million per individual (adjusted for inflation). If you are in that range, planning now matters.

How to Minimize Estate Tax

Annual gift exclusion: In 2026, you can give up to $18,000 per person per year without triggering gift tax or using your lifetime exemption. Couples can give $36,000 per recipient. This is a powerful way to transfer wealth over time.

Irrevocable life insurance trusts (ILITs): Life insurance proceeds are typically included in your taxable estate if you own the policy. An ILIT owns the policy instead, keeping the death benefit out of your estate.

Charitable giving: Donations to qualified charities reduce your taxable estate. Charitable remainder trusts and charitable lead trusts can also provide income and tax benefits during your lifetime.

Trusts: Various trust structures — including marital trusts, bypass trusts, and grantor retained annuity trusts (GRATs) — can remove assets from your taxable estate or freeze their value for estate tax purposes.

Business valuation discounts: Interests in closely held businesses or family limited partnerships can be valued at a discount for estate tax purposes, reducing the taxable value of those assets.

Spousal unlimited marital deduction: Assets passed to a U.S. citizen spouse are not subject to estate tax at the first death. The estate tax issue is deferred to the second spouse’s death.

What Happens If There Is No Estate Plan?

If you die without a will or estate plan (called dying “intestate”), your state’s laws determine how your assets are distributed. Your estate may go through probate — a public, court-supervised process — which takes time and costs money. For large estates, this can also create unnecessary tax exposure.

Do You Need an Estate Planning Attorney?

For simple estates well below the exemption threshold, a basic will, beneficiary designations, and powers of attorney are often sufficient. For larger estates, blended families, business interests, or anyone near the exemption threshold, working with an estate planning attorney is strongly recommended. The tax savings can far outweigh the cost of professional advice.

Bottom Line

The federal estate tax only applies to estates above roughly $14 million, but state-level estate and inheritance taxes can hit at much lower thresholds. If you have significant assets, annual gifting, trusts, and strategic planning can reduce your estate’s tax burden — preserving more wealth for your heirs.

For more on this topic, see our guide on how a Grantor Retained Annuity Trust (GRAT) can help reduce your estate tax burden.

For more on this topic, see our guide on how a Charitable Remainder Trust can reduce your taxable estate while generating income.