The federal estate tax — sometimes called the "death tax" — applies to the transfer of wealth from a deceased person's estate to their heirs. Despite the political controversy surrounding it, relatively few estates actually owe federal estate tax in any given year. In 2025, only estates exceeding $13.99 million per individual (or $27.98 million for a married couple using portability) are subject to federal estate tax. This means the vast majority of Americans will never owe a dollar of federal estate tax under current law.
However, the landscape is about to change dramatically. The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate tax exemption, and this provision is set to expire ("sunset") after December 31, 2025. If Congress takes no action, the exemption will revert to approximately $7 million per individual (adjusted for inflation), potentially exposing millions of additional dollars in wealth to a 40% federal estate tax rate.
How the Federal Estate Tax Works
The federal estate tax uses a graduated bracket system, but because the unified credit effectively eliminates tax on amounts below the exemption threshold, the practical effect is a flat 40% rate on everything above the exemption. The tax is calculated on the "taxable estate," which equals the gross estate minus allowable deductions: the marital deduction, charitable bequests, debts and mortgages, funeral expenses, and administrative expenses.
State Estate and Inheritance Taxes
Even if your estate falls below the federal threshold, you may owe state-level estate or inheritance taxes. Twelve states plus Washington D.C. impose estate taxes, with exemptions ranging from just $1 million in Massachusetts and Oregon to $13.61 million in Connecticut (which mirrors the federal exemption). Separately, six states impose inheritance taxes — paid by the heirs receiving the assets rather than by the estate itself. Maryland is unique in having both an estate tax and an inheritance tax.
Key Planning Strategies
The most effective estate tax planning combines several approaches. The annual exclusion gift ($19,000 per recipient in 2025) is the simplest: each year you can reduce your taxable estate by making gifts to family members or others without using your lifetime exemption. Over time, this "annual exclusion gifting" can significantly erode a large estate. A couple with four adult children and eight grandchildren could transfer $456,000 per year completely tax-free.
For larger estates, irrevocable trusts are the primary tool. The Irrevocable Life Insurance Trust (ILIT) removes life insurance proceeds from the estate, while the proceeds can be used to pay estate taxes without forcing a fire-sale of assets. The Grantor Retained Annuity Trust (GRAT) allows appreciation in assets to pass to heirs with little or no gift tax — particularly powerful for rapidly appreciating assets like business interests or growth stocks.
Given the TCJA sunset risk, advisors are strongly recommending that high-net-worth clients use their current high exemption before it disappears. Spousal Lifetime Access Trusts (SLATs) allow one spouse to make a large gift to an irrevocable trust benefiting the other spouse, using up the current exemption while technically maintaining some access to the funds. This strategy must be done carefully to avoid the "reciprocal trust doctrine."