Estate Tax
What Is Estate Tax?
Estate tax is a tax imposed on the transfer of a person’s assets after death. The tax is calculated based on the total value of the deceased person’s estate before the assets are distributed to heirs or beneficiaries.
Estate taxes are sometimes referred to as “death taxes,” though the official term used by tax authorities is estate tax.
Why It Matters
Estate tax can significantly affect how wealth is transferred between generations. Understanding estate tax rules helps families plan their financial legacy and minimize tax burdens on inherited assets.
Many estates are not subject to federal estate tax because of high exemption thresholds.
How Estate Tax Works
When a person dies, their estate may include assets such as:
- real estate
- investments
- business ownership interests
- cash and savings accounts
If the total value of the estate exceeds the federal exemption limit, estate tax may apply to the portion above that threshold.
Estate planning tools such as trusts may help reduce estate tax exposure.
Example
If an estate worth $15 million exceeds the federal exemption threshold, estate taxes may apply to the amount above the exemption limit.
Estate Tax vs Inheritance Tax
Estate tax is paid by the estate before assets are distributed.
Inheritance tax is paid by the individuals who receive the assets.
FAQs About Estate Tax
Who pays estate tax?
The estate itself typically pays the tax before assets are distributed.
Do all estates pay estate tax?
No. Many estates fall below the federal exemption limit.
Can estate planning reduce estate taxes?
Yes. Tools such as trusts or gifting strategies may help reduce exposure.
Related Terms
