What Is Death Tax?

Death and taxes may be inevitable. But what's sometimes referred to as “death tax” may not be. Explore whether state and federal taxes on your legacy could impact your assets and your heirs.

Understanding Death Tax

Death Tax Definition

Officially, there is no “death tax”. It’s a derisive nickname that became a popular way to refer to estate tax and inheritance tax – two types of tax that could ultimately be triggered by your passing. While they may sound similar, estate tax and inheritance tax are quite different – and you may be subject to one, both or neither of them, depending on your total assets and your location.

Estate Tax vs Inheritance Tax

Key Differences

The main difference between estate tax and inheritance tax is when and how the taxes are taken.  

Estate tax is imposed upon your estate – the total value of everything you own when you die, including cash, investments, property and other assets. It’s paid directly from your estate before any assets are distributed to your heirs. Inheritance taxes, on the other hand, are paid by your heirs upon receiving assets from your estate.

How Does Death Tax Work?

Federal Estate Tax and Exemption

Determining whether your estate is subject to federal estate tax starts with an accounting of the fair market value of everything you own at the time of death. This includes cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Then, deductions (which can include charitable donations, certain types of debt owed and administrative costs of settling the estate) are applied to arrive at the taxable amount of your estate.

Estate tax is generally owed if your taxable estate is valued at more than the filing threshold for the year of death, known as the estate tax exemption. The 2025 federal estate tax exemption is $13.99 million for individuals – meaning that the tax usually applies to a very small percentage of estates. In fact, in 2019 – the most recent year for which data are available – only 8 of every 10,000 people (.08%) who died left an estate large enough to trigger the tax.

If you do have to pay, the portion of the estate that’s above the exemption is taxed at rates between 18% to 40%, a top rate that’s been unchanged since 2013.

State Estate and Inheritance Taxes and Exemptions

While the federal government only imposes estate tax, estate and inheritance taxes vary by state. Currently, 12 states and the District of Columbia have additional estate taxes and five states levy inheritance taxes. Only Maryland imposes both. However, some heirs may avoid inheritance tax. For example, in New Jersey, the first $25,000 of an inheritance is untaxed. And in all of the states that have inheritance taxes, spouses are exempt, with some states fully or partially exempting immediate relatives.

Keep in mind also that with ongoing legislative discussions and potential reforms, these taxes are subject to change from year to year. Below are the rates and exemptions as of 2024, removing Iowa, which has repealed its inheritance tax effective January 1, 2025.

Estate and Inheritance Taxes by State (2024)

Source: Tax Foundation: Estate and Inheritance Taxes by State, 2024

How to Help Avoid Death Tax

Estate Planning Strategies

While estate and inheritance tax can threaten to take a bite out of your legacy, there are ways to help minimize or possibly avoid them if you plan ahead and take action. Here are a few strategies to consider:

• Set up a credit shelter/bypass trust – This effectively "shelters" the exemption of the deceased spouse – this can be an effective way to help minimize or potentially avoid state estate tax.
• Gift assets to family during your lifetime – Rather than waiting until you pass away, you can give away a certain amount each year – $19,000 per recipient in 2025 – without triggering gift tax. This can also help reduce your taxable estate.
• Give to charity – Assets that you leave to charity may be excluded from your taxable estate and can also provide additional tax benefits today.
• Take advantage of the unlimited marital deduction – Spouses can transfer assets to each other tax-free, deferring estate taxes until the surviving spouse’s death.

Consulting with a Financial Advisor

Of course, you don’t have to make any decisions alone. Navigating complex tax laws can be a challenge, and they may change from year to year, or from administration to administration. When it comes to making financial moves that can impact your estate and your legacy, always involve your qualified tax and legal professionals. It can also help to consult with a seasoned financial advisor, especially one with tax planning expertise.

Estate Planning and Death Tax

Importance of Estate Planning

Creating strategies to help shield against death taxes is just one piece of what should be a comprehensive estate planning strategy. Contrary to what some believe, estate planning is for everyone, not just the super wealthy. Through a combination of instruments like a will, a trust and power of attorney, you can direct where your assets end up and help control key decisions that impact yourself and your loved ones.

Understanding and Managing Death Taxes

Nobody likes to think of taxes eroding their hard-earned wealth. But when it comes to “death and taxes”, it’s not all doom and gloom. As we’ve seen, the odds of your estate being subject to federal estate tax may actually be very low. And you may live in a state that doesn’t impose additional estate tax or inheritance tax. If you are at risk though, there’s plenty you can do during your lifetime to help minimize – or even eliminate – estate and inheritance taxes. Start by talking to a financial advisor who can work with your qualified tax and legal professionals to see what steps you can take and which estate planning strategies you can employ to help protect your family and your assets.