Estate Taxes: What are They and Who Pays Them?

The federal estate tax is a tax levied on estates whose value exceeds the federal threshold. While this threshold increases over time, it is in the tens of millions of dollars. If you are the executor of a significantly large estate, or you plan to leave assets to beneficiaries well in excess of $15 million, it’s critical to understand how these taxes work and how to mitigate the impact they might have on your estate.

Key Takeaways

• The 2026 federal estate tax threshold is $15 million.
• Estate taxes are only levied on the portion of the estate exceeding the threshold, not the entire estate.
• Estate taxes can range from around 20 percent all the way up to 40 percent at the high end.
• There are a variety of exemptions and deductions available that can help reduce your tax liability when your estate is settled.

What is an Estate Tax?

An estate tax is a tax levied on property transferred after the property owner dies. This type of tax is relatively uncommon, as it applies only to particularly large estates—the minimum threshold for filing estate taxes in 2026 is $15 million for individuals and $30 million for married couples.

How does Estate Tax Work?

The first step in calculating a recently deceased individual’s estate tax liability is to determine the value of their gross estate. This figure is the sum of the fair market value of all the decedent’s property and assets, regardless of what price was paid at the time of the assets’ purchase or how long the decedent has owned the assets.

Once the value of the gross estate is calculated, the value of all taxable gifts distributed between the year 1977 and the year in which the estate tax is filed must be calculated. To determine this amount, subtract the yearly exemption amount from the decedent’s total gift-giving for each of these years. 

Certain transfers of funds and property are exempt from gift taxes. If you have questions about how to calculate the decedent’s lifetime taxable gift amount, Horizons Wealth Management is a great resource to help to inform your financial strategy for future generations.

If the sum of the gross estate and eligible, taxable gifts exceeds the threshold for the estate tax, the executor of the estate must pay estate taxes on what’s known as the taxable estate. This is essentially just the gross estate minus some allowable exemptions, which can significantly reduce the amount of estate tax owed.

These exemptions include mortgages and debt, charitable donations, transfers of assets to surviving spouses, and several other less common exemptions.

How Much is the Estate Tax?

The amount of estate tax paid on estates valued over $15 million varies with the size of the estate. Tax rates and total amounts are calculated based on the amount by which the estate exceeds the tax threshold, not the entire estate.

Estates which only barely exceed the threshold are assessed an 18 percent tax rate, while estates exceeding the threshold by $1 million or more will face a 40 percent tax rate on this taxable portion of the estate. Additionally, most eligible estates will face a base tax in addition to the percentage owed. This base tax scales with the size of the estate, and ranges from nothing all the way up to $345,800 in 2026.

Which States have an Estate Tax?

While the federal government levies an estate tax on eligible estates in all 50 states, some states have their own additional estate tax. In 2026, only 12 states and the District of Columbia had a separate state estate tax:

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

North Carolina had a separate state tax on estates, but the tax was repealed in 2013.

It’s important to note that estate taxes on property located in another state are assessed by the state where the property is located, not where the beneficiary lives. Someone living in a state without an additional estate tax might still be required to pay estate taxes on large real estate inheritances if the property is located in a state that levies this sort of tax.

How to Reduce Estate Taxes

While estate taxes are rare, in cases where an estate is large enough to qualify for the tax there are often ways to reduce the beneficiaries’ tax liabilities. Some of the most common ways to reduce estate taxes include:

• Making annual gifts. In 2026, the annual gift-giving limit is $20,000. These gifts can be distributed to as many individuals as you’d like without triggering gift taxes. Instead of leaving a single large sum to beneficiaries upon the decedent’s death, spreading the distribution of an inheritance over many years allows for a lower tax obligation at the end of their life.

• Establishing trusts. Certain trusts are excluded from an individual’s taxable estate. These include Irrevocable Life Insurance Trusts, Grantor Retained Annuity Trusts, and Qualified Personal Residence Trusts. Ask your financial advisor about trust structures that might protect your beneficiaries from estate taxes in the future.

• Using the marital deduction. A surviving spouse can receive an unlimited number of assets tax-free from the decedent, allowing a large portion of the estate to remain untaxed upon their passing.

• Donating to charity. Charitable donations are typically excluded from a decedent’s taxable estate, making them a popular avenue to reduce tax liability. By supporting an organization or cause that’s important to the deceased, these sorts of exemptions present a win-win for the beneficiaries and the recipients of the donations.

Bottom Line

Estate taxes can seem daunting for those planning their estates, but they are relatively straightforward and only apply in a small number of cases. If your estate is large enough to qualify for these types of taxes, it’s important to understand what to do when executing the estate and how to take advantage of all of the deductions and exemptions available to you.

If you’re unsure about whether you qualify for the estate tax, or you want to better understand these types of taxes, Horizons offers a variety of financial planning services to help you secure your financial future.

Estate Tax and Lifetime Giving FAQ