An estate tax is an amount that may be paid from your assets to the government after you die.
It’s typically only a concern for people who have at least $1 million in assets or more.
An estate tax is sometimes called a “death tax.” It’s what your estate (which is the total sum of your assets—think cash, stocks, real estate, etc.) must pay after you die before your friends and loved ones can collect whatever you left them.
The federal government and around a dozen states have an estate tax.
The estate tax technically applies to everyone, but it’s rarely actually paid in practice.
That’s mainly because it only applies to estates that are larger than a certain cutoff level. If your estate is worth less than the cutoff, your estate owes nothing.
In 2021, the federal exemption was $11.7 million (individual states set their own thresholds, which are often lower). That means only estates valued at more than that amount had to pay any taxes, and they only owed taxes on anything above that number.
One other important caveat: You won’t face a tax if your estate goes entirely to your spouse.
The federal government and individual states have different estate tax rates.
Anything you own or hold an interest in before you die may be counted as part of your taxable estate. This includes cash, stocks, real estate, some types of trusts, and businesses.
When someone dies, their “executor” is in charge of settling their financial affairs (people often name an executor in their will, or a court may appoint someone). It’s the executor’s job to add up the value of the estate and then subtract for deductions and credits. These may be available for:
After that, if your estate is still worth more than the exemption, it will owe taxes.
Wealthy families often try to reduce the amount of estate taxes they’ll owe. There are a few typical tools and strategies they may use to do so, including:
People sometimes confuse estate taxes with inheritance taxes. They’re both charged because someone died, but there are some key differences.
|Estate tax||Inheritance tax|
|Who owes it||The estate of the person who died||The person receiving the inheritance|
|What assets it applies to||The total value of the estate||The value of the inheritance|
|Who charges it||
An estate tax is money paid from your estate to the federal or state government after you die. Your estate has to pay this before your assets can be transferred to your beneficiaries. However, most estates don’t have to pay any tax because it only applies to estates that are worth more than a certain minimum value.