The question what is the federal estate tax is increasingly important for those planning their estates in 2025. The federal estate tax, often called the “death tax,” applies to the transfer of a deceased person’s estate to heirs. Understanding how it works is crucial to minimize taxes, protect family wealth, and plan asset distribution effectively.
Key Points Summary
- Exemption threshold: Estates under $13.99 million per individual and $27.98 million for married couples in 2025 are not taxed.
- Tax rate: Federal estate tax ranges from 18% to 40% on the portion exceeding the exemption.
- Future adjustment: Exemption increases to $15 million per individual and $30 million per couple in 2026, adjusted for inflation.
- State estate taxes: Some states have lower thresholds and their own tax rates.
- Planning strategies: Using trusts, gifting strategies, and charitable donations can reduce federal estate tax liability.
Understanding the Federal Estate Tax
The federal estate tax is levied on the total value of a deceased person’s estate above a certain threshold. It includes all assets: real estate, cash, investments, business interests, and other property. The tax only applies to the value exceeding the exemption amount, ensuring most estates are not impacted.
Exemption Thresholds
In 2025, the exemption threshold is $13.99 million per individual and $27.98 million for married couples. Estates valued below these amounts are exempt from federal estate tax. Estates above these thresholds pay tax on the excess value.
The exemption will rise in 2026 to $15 million per individual and $30 million per couple, adjusted for inflation. This adjustment provides greater planning certainty for high-net-worth families.
Tax Rates
The federal estate tax is progressive, ranging from 18% to 40%. Estates just above the exemption threshold are taxed at lower rates, while extremely high-value estates are taxed at the top rate of 40%. Understanding this scale is essential for accurate estate planning.
Planning Strategies to Reduce Estate Tax
Even if an estate exceeds the exemption threshold, strategic planning can reduce the taxable amount.
Gifting Strategies
Lifetime gifts can reduce the size of a taxable estate. In 2025, the annual gift tax exclusion is $19,000 per recipient. Gifts exceeding this amount count toward the lifetime exemption but can lower the estate’s value and federal estate tax liability.
Trusts
Establishing trusts, such as irrevocable life insurance trusts, removes assets from the taxable estate. Trusts allow control over asset distribution and reduce federal estate tax exposure.
Charitable Donations
Donating to qualified charities provides deductions that reduce estate tax liability. Charitable gifts also help heirs manage tax exposure while supporting causes they care about.
State Estate Taxes
Some states have their own estate taxes separate from federal taxes. State exemptions are often lower, and tax rates vary. States like Oregon, Washington, and Massachusetts have estate tax thresholds well below the federal exemption. It is important to consider both federal and state rules when planning asset transfers to heirs.
Recent Developments
In 2025, the federal estate tax has undergone key updates:
- Exemption increase: The threshold is $13.99 million per individual and $27.98 million per married couple.
- Permanent adjustment: Legislative changes made this increase permanent, providing certainty for future estate planning.
- Future inflation adjustment: Exemption is set to rise to $15 million per individual and $30 million per couple in 2026, indexed to inflation.
These changes affect high-net-worth estates and highlight the need for careful planning to manage potential tax liabilities.
Key Takeaways
- The federal estate tax applies only to estates exceeding $13.99 million for individuals and $27.98 million for married couples in 2025.
- Tax rates are progressive, from 18% to 40%, based on estate value above the exemption.
- Planning strategies like trusts, lifetime gifts, and charitable donations can reduce estate tax liability.
- State estate taxes may apply and should be considered alongside federal tax rules.
- Staying informed about exemption thresholds and tax law changes is critical for effective estate planning.
Frequently Asked Questions
Q1: What is the federal estate tax rate?
The federal estate tax rate ranges from 18% to 40% on the portion of the estate exceeding the exemption threshold.
Q2: How can I reduce my estate tax liability?
Effective strategies include lifetime gifting, creating trusts, and making charitable donations.
Q3: Do all states impose estate taxes?
No. Only some states have their own estate taxes, and thresholds and rates differ from the federal government.
Disclaimer: The information provided is for general informational purposes and should not be considered legal or financial advice. Tax laws are subject to change, and individual circumstances may vary. Consult a qualified tax professional or legal advisor to understand your specific estate tax obligations.