Estate tax in the United States

In the United States, the estate tax is a federal tax on the transfer of the estate of a person who dies. The tax applies to property that is transferred by will or, if the person has no will, according to state laws of intestacy. Other transfers that are subject to the tax can include those made through a trust and the payment of certain life insurance benefits or financial accounts. The estate tax is part of the federal unified gift and estate tax in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.
In addition to the federal government, 12 states tax the estate of the deceased. Six states have "inheritance taxes" levied on the person who receives money or property from the estate of the deceased.
The estate tax is periodically the subject of political debate. Some opponents have called it the "death tax" while some supporters have called it the "Paris Hilton tax".
There are many exceptions and exemptions that reduce the number of estates with tax liability: in 2021, only 2,584 estates paid a positive federal estate tax.
If an asset is left to a spouse or a federally recognized charity, the tax usually does not apply. In addition, a maximum amount, varying year by year, can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes: for estates of persons dying in 2014 and 2015, for estates of persons dying in 2016. Because of these exemptions, it is estimated that only the largest 0.2% of estates in the U.S. will pay the tax. For 2017, the exemption increased to. In 2018, the exemption doubled to per taxpayer due to the Tax Cuts and Jobs Act of 2017. As a result, about 3,200 estates were affected by this 2018 increase and were not liable for federal estate tax.
The current individual exemption in 2024 is $13.61 million, or $27.22 million for a married couple.

Federal estate tax

The federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States."
Federal estate taxes give very wealthy families incentives to transfer resources directly to distant generations in order to avoid taxes on successive rounds of transfers. Until recently such transfers were impeded by the rule against perpetuities, which prevented transfers to most potential not-yet-born beneficiaries. Many American states have repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual trusts designed to benefit distant generations, avoid taxes, and maintain a degree of control over the financial affairs of descendants in perpetuity.
One of the major concerns that motivate estate planning is the potential burden of federal taxes, which apply both to gifts during lifetime and to transfers at death. In practice, only a small fraction of U.S. estates is taxable, reflecting that exemption levels are high and transfers to surviving spouses are entirely excluded from taxable estates; but those estates that are subject to federal taxation typically face high rates. Taxpayers commonly arrange their affairs to soften the impact of federal taxation.
The starting point in the calculation is the "gross estate". Certain deductions from the "gross estate" are allowed to arrive at the "taxable estate".

The "gross estate"

The "gross estate" for federal estate tax purposes often includes more property than that included in the "probate estate" under the property laws of the state in which the decedent lived at the time of death. The gross estate may be considered to be the value of all the property interests of the decedent at the time of death. To these interests are added the following property interests generally not owned by the decedent at the time of death:

the value of property to the extent of an interest held by the surviving spouse as a "dower or curtesy";
the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death, other than certain gifts, and other than property sold for full value;
the value of certain property transferred by the decedent before death for which the decedent retained a "life estate", or retained certain "powers";
the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent;
the value of certain property in which the decedent retained a "reversionary interest", the value of which exceeded five percent of the value of the property;
the value of certain property transferred by the decedent before death where the transfer was revocable;
the value of certain annuities;
the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.;
the value of certain "powers of appointment";
the amount of proceeds of certain life insurance policies.

The above list of modifications is not comprehensive.
As noted above, life insurance benefits may be included in the gross estate. Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy. Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process under state law.

Deductions and the taxable estate

Once the value of the "gross estate" is determined, the law provides for various deductions in arriving at the value of the "taxable estate." Deductions include but are not limited to:

Funeral expenses, administration expenses, and claims against the estate;
Certain charitable contributions;
Certain items of property left to the surviving spouse.
Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia.

Of these deductions, the most important is the deduction for property passing to the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse is not a U.S. citizen. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses.

Tentative tax

The tentative tax is based on the tentative tax base, which is the sum of the taxable estate and the "adjusted taxable gifts". For decedents dying after December 31, 2009, the tentative tax will, with exceptions, be calculated by applying the following tax rates:

Lower limit	Upper limit	Cumulated tax payable	Tax rate between limit
0	$10,000	$0	18% of the amount
$10,000	$20,000	$1,800	20% of the excess
$20,000	$40,000	$3,800	22% of the excess
$40,000	$60,000	$8,200	24% of the excess
$60,000	$80,000	$13,000	26% of the excess
$80,000	$100,000	$18,200	28% of the excess
$100,000	$150,000	$23,800	30% of the excess
$150,000	$250,000	$38,800	32% of the excess
$250,000	$500,000	$70,800	34% of the excess
$500,000	$750,000	$155,800	37% of the excess
$750,000	$1,000,000	$248,300	39% of the excess
$1,000,000	and over	$345,800	40% of the excess

The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death.

Credits against tax

There are several credits against the tentative tax, the most important of which is a "unified credit" which can be thought of as providing for an "exemption equivalent" or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime.
For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is, so if the sum of the taxable estate plus the "adjusted taxable gifts" made during lifetime equals or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion increased to in 2009, and the estate tax was repealed for estates of decedents dying in 2010, but then the Act was to "sunset" in 2011 and the estate tax was to reappear with an applicable exclusion amount of only.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 became law on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit with the federal gift tax credit. The gift tax exemption is equal to for estates of decedents dying in 2013, and for estates of decedents dying in 2014.
The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouse's credit that was not previously used. If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.
Because of these exemptions, only the largest 0.2% of estates in the US will have to pay any estate tax.
Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.