What Are Death Taxes?

Death taxes are taxes imposed by the federal and some state governments on someone's estate upon their death. These taxes are levied on the beneficiary who receives the property in the deceased's will or the estate that pays the tax before transferring the inherited property.

Death taxes are also called death duties, estate taxes, or inheritance taxes.

Understanding Death Taxes

A death tax can be any tax imposed on property transfer after someone's death. The term “death tax” gained popularity in the 1990s and was used to describe estate and inheritance taxes by those who wanted the taxes repealed. In estate taxes, the deceased’s estate pays the tax before the assets are transferred to a beneficiary. With the inheritance tax, the person who inherits the assets pays.

The estate tax, charged by the federal government and some state governments, is based on the value of property and assets at the time of the owner's death. The federal estate tax ranges from 18% to 40% of the inheritance amount.

Twelve states impose a state estate tax separate from the federal government. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.

The federal government does not impose an inheritance tax, but several states do—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania; however, in all of these states, property passing to a surviving spouse is exempt from inheritance taxes. Nebraska and Pennsylvania impose taxes on property passing to a child or grandchild in some instances.

Death Tax Thresholds

Most people end up not paying the death tax because it applies to only a few people. This is because the 2017 Tax Cuts and Jobs Act applied the estate tax to the basic exclusion amount, which in 2023 is $12.92 million and in 2024 is $13.61 million.

For example, assume an individual leaves an estate valued at $13 million (accounted for inflation) in non-exempt assets to the children and has never left any gifts that exceeded the exclusion amount. The amount above the federal level in 2023 ($13 million – $12.92 million), $80,000, will be subject to estate tax. According to the Unified Rate Schedule, the taxable amount is subject to a 28% tax plus a base tax of $18,200. Therefore, the estate will have a death tax liability of (28% x $80,000) + $18,200 = $40,600.

So, if a decedent's estate is valued at less than the applicable exemption amount for the year of death, the estate won't owe any federal estate taxes.

Unified Tax Credit

The unified tax credit has a set amount that an individual can gift during their lifetime before any death taxes or gift taxes apply. The tax credit unifies both the gift and estate taxes into one tax system, decreasing the tax bill of the individual or estate, dollar to dollar.

Since some people prefer to use the unified tax credits to save on estate taxes after their deaths, the unified tax credit may not be used for reducing gift taxes while still alive. It may instead be used on the inheritance amount bequeathed to beneficiaries after death.

Unlimited Marital Deduction

Another provision available to reduce death tax is the unlimited marital deduction, which allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from tax.

The provision eliminates both the federal estate and gift tax on property transfers between spouses, in effect treating them as one economic unit. The transfer to surviving spouses is made possible through an unlimited deduction from estate and gift tax that postpones the transfer taxes on the property inherited from each other until the second spouse’s death.

Advantages and Disadvantages of Death Taxes

Advantages

• High threshold: The death tax is triggered when estates are valued at more than $12.92 million in 2023 and $13.61 million in 2024, so only the very wealthy need to be concerned about it.
• High tax revenue: As of Oct. 31, 2023, for the fiscal year to date, the government has collected $4 billion in revenues from estate and gift taxes.

Disadvantages

• Double taxes: Those whose estates are large enough to trigger death taxes will be taxed twice—once with income taxes and once with the estate tax.
• Loopholes: There are ways to avoid paying estate taxes, so it is natural for those who have the assets to use these loopholes to avoid paying them.

How to Reduce or Avoid Death Taxes

Most people will not need to worry about death taxes because not many have more than $12.92 million in assets. This number may drop after 2025 if Congress doesn't renew the Tax Cuts and Jobs Act, but the figure could still be $5 million or more—more than most people have. If you do happen or expect to have enough assets to trigger death taxes, there are some things you can do to reduce or avoid them:

• Create an irrevocable trust: You may be able to place your assets in an irrevocable trust to shield them from estate taxes. You could then have the trust distribute the funds to you and your beneficiaries as income, reducing your tax burden. The most common trust used in this tactic is a grantor retained annuity trust (GRAT).
• Give your assets to family and friends: You can give them away to relatives and friends tax-free as long as you don't exceed the lifetime exclusion limit of $12.92 million ($25.84 million if you and your spouse give them away) in 2023 and $13.61 million ($27.22 million if you and your spouse give them away) in 2024.
• Enjoy your money: The best way to avoid estate taxes is to ensure you give enough away so that your family won't struggle, then go out and enjoy the money you've worked hard for.
• Charitable donations: Giving away money to charitable organizations you believe in can be rewarding—you can also deduct contributions from your estate.

The Bottom Line

The death tax is a tax on a person's estate after they have passed. Also known as estate taxes, to be triggered, the estate must have significant assets—more than $12.92 million in 2023 or $13.61 million in 2024. Most people will not need to worry about a death tax, but for those who do, there are some tactics you can use to reduce or avoid the tax.