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Understanding U.S. Estate and Gift Tax Thresholds and Rates

Here’s a quick breakdown of lifetime estate and gift tax exemptions and top federal tax rates by year:

What Is the Estate Tax?

The federal estate tax is a tax applied to the value of a person’s assets after death, before distribution to beneficiaries. It’s sometimes informally called the “death tax.” While states may have their own estate tax rules, this guide focuses on the federal estate tax only. (Want state-specific details? [Click here]).

Not all estates are taxed—only those that exceed the IRS exemption limit for that year. Assets passed on to a surviving spouse are not taxed due to the marital deduction. Only the portion of the estate exceeding the exemption and transferred to other beneficiaries is potentially taxable.

How Common Is Estate Tax in the U.S.?

Most Americans never pay federal estate taxes. According to the Urban-Brookings Tax Policy Center, federal estate and gift taxes raised just $17.6 billion in 2020—about 1% of the over $1 trillion transferred via inheritance or gifts.

There are several reasons why most estates go untaxed:

• The exemption level is high.

• There are legal strategies and tools—like trusts or discounted asset transfers to family—that reduce taxable estate value.

• Many individuals plan ahead to minimize liability.

Understanding Inheritance Tax

Unlike the estate tax (which is paid from the estate before distribution), inheritance tax is paid by the person receiving the inheritance. The federal government does not impose inheritance tax, but some states do.

Tax rates vary based on:

• Relationship to the deceased (closer family typically pays less or nothing)

• Value of assets received

Spouses and often children are typically exempt or taxed at low rates. Distant relatives or unrelated heirs may pay more, depending on the state’s law.

How to Calculate the Taxable Estate

To figure out the taxable portion of an estate:

1. Determine total assets – This includes bank accounts, investments, real estate, business ownership, insurance, and personal valuables. These are valued at their current fair market value, not purchase price.

2. Subtract allowable liabilities – Mortgage balances, outstanding debts, funeral costs, and qualified charitable bequests can reduce the taxable estate.

3. Add taxable gifts made during life – Gifts above annual exclusion limits, made since 1977, are added to the estate value.

4. Apply the unified credit – This helps offset the estate tax based on current IRS exemption thresholds.

Estate Tax Reduction Strategies

Here are a few ways to potentially reduce your estate tax burden:

• Spend while alive: Use your wealth responsibly to reduce your taxable estate.

• Donate to charity: Gifts to qualified nonprofits are fully deductible from your estate.

• Marital transfers: If legally married, you can pass your estate tax-free to your spouse.

• Relocate: Consider moving out of states that levy estate or inheritance taxes.

• Alternate valuation: In some cases, you may use the asset value six months after death, which can reduce tax liability.

Annual Gift Tax Exclusion

The annual gift exclusion allows anyone to give up to $19,000 per recipient (2025 limit) without triggering a gift tax. Gifts can include cash, property, or other assets.

Some types of gifts are always tax-free, such as:

• Charitable contributions

• Gifts to your spouse

• Donations to political organizations

• Direct payments for someone’s tuition or medical bills

Unified Tax Credit Explained

The unified credit combines your lifetime gift and estate tax exemption into a single pool. If you give large gifts during your lifetime beyond the yearly exclusion, they count toward your lifetime exemption limit.

Example:
If you give away $2 million during your life and die in 2025 (with a $13.99 million exemption), your remaining exemption is $11.99 million.

Unused portions of your exemption may transfer to a surviving spouse.

Basics of Estate Planning

Good estate planning starts with:

1. Listing assets: Include everything, even sentimental or low-value items.

2. Creating a will: This legal document outlines your wishes but does not skip probate.

3. Assigning powers of attorney: These legal documents let someone act on your behalf, including for health care decisions.

4. Understanding probate: Probate can be time-consuming and costly. Planning with this in mind helps protect your estate.

Always consult a qualified estate attorney to ensure your plan meets both state and federal legal standards.

Why Trusts Are Useful in Estate Planning

A trust is a legal arrangement that holds and manages assets for beneficiaries. Trusts can reduce estate taxes, avoid probate, and offer more control over how and when assets are distributed.

There are two main types:

• Living Trust (Inter Vivos): Created while you’re alive; helps avoid probate.

• Testamentary Trust: Created through your will and takes effect after death.

Trusts can offer privacy, reduce court involvement, and protect heirs from creditors or mismanagement.