The federal estate tax — sometimes called the 'death tax' — applies to the transfer of wealth at death and tops out at 40%. Despite the political controversy surrounding it, relatively few estates actually owe any federal estate tax. In 2025, the exemption stands at $13.99 million per individual ($27.98 million for a married couple using portability), meaning the vast majority of Americans face no federal liability. But with the TCJA sunset looming, high-net-worth families need to act now.
How the Federal Estate Tax Works
The federal estate tax uses a graduated bracket system with rates up to 40%, but because the unified credit effectively eliminates tax on amounts below the exemption, the practical effect is a near-flat 40% rate on everything above the threshold. The calculation starts with the gross estate — virtually everything you own at death — and then subtracts allowable deductions: the unlimited marital deduction (assets to a U.S. citizen spouse), charitable bequests, debts and mortgages, funeral expenses, and administrative expenses.
What remains is the taxable estate. If this amount exceeds the federal exemption ($13.99M in 2025), the excess is taxed. For example, an individual with a $20M estate, $0 in deductions, and no spouse owes estate tax on $6.01M — roughly $2.4M at the 40% rate. Married couples have a significant advantage through portability: if the first spouse dies using only a portion of their exemption, the surviving spouse can inherit the unused amount (called the DSUE — Deceased Spousal Unused Exemption), effectively doubling the household's combined protection to nearly $28M in 2025.
State Estate and Inheritance Taxes
Even if your estate falls below the federal threshold, you may owe state-level taxes. Twelve states plus Washington D.C. impose their own estate taxes, with exemptions dramatically lower than the federal level. Massachusetts and Oregon tax estates above just $1 million — a threshold easily reached with a home, retirement accounts, and life insurance. Connecticut has raised its exemption to mirror the federal level. Washington State applies rates up to 20% — the highest in the nation.
Separately, six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Inheritance taxes are paid by the heirs receiving assets, not the estate itself, and rates typically vary based on the heir's relationship to the decedent. Spouses are usually exempt; more distant relatives face higher rates. Maryland is unique in having both an estate tax and an inheritance tax, making it one of the most tax-hostile states for wealth transfer. If you live in a state with a low exemption, state estate planning is just as important as federal planning — sometimes more so for mid-sized estates.
Key Planning Strategies
The most effective estate tax planning combines several approaches layered over time. 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 without using any of your lifetime exemption. A couple with four adult children and eight grandchildren could transfer $456,000 per year completely tax-free using only annual exclusion gifts — reducing their estate by $4.56M over a decade.
For larger estates, irrevocable trusts are the primary tool. The Irrevocable Life Insurance Trust (ILIT) removes life insurance proceeds from the estate while keeping the proceeds available to pay estate taxes without forcing a fire-sale of assets. The Grantor Retained Annuity Trust (GRAT) allows appreciation in rapidly growing assets (business interests, growth stocks) to pass to heirs with little or no gift tax by transferring only the growth above a hurdle rate. Charitable Remainder Trusts (CRTs) can provide income during life, reduce the estate, and benefit a charity at death.
Given the TCJA sunset risk — the exemption is projected to fall to approximately $7M per individual after December 31, 2025 — advisors are urgently 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, locking in the current exemption while technically maintaining some indirect access. This strategy carries risks (the reciprocal trust doctrine, loss of direct access) that must be carefully navigated with qualified counsel.