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Before we dive into the topic, there is a lot of talk about the stock market crash. Please read my newsletter issue #62 if you are worried or don’t know what to do.
Now, when you are building wealth, you don’t really think about estate taxes.
But did you know that when you pass away, everything you own might be subject to an estate tax of up to 40% just on the federal level?
That’s a significant amount. Some might say, “Well, I’m dead, I don’t care” while others say “I worked hard all my life, I want my kids/beneficiaries to have as much money as they can and minimize my taxes”
I want to cover this topic so you at least are familiar with the basics, regardless of which bucket you fall into.
Some basics
The estate tax is a tax on your right to transfer assets at your death to beneficiaries.
Simply put, it’s essentially a tax on everything you own, or have certain interests in, if it exceeds the exemption amount.
In addition to the federal estate tax, some states may also have a state estate tax or an inheritance tax.
What is even an estate?
An estate is a legal entity created as the result of a person’s death. It’s a separate legal entity that has to file a tax return.
An estate will have all real and personal property of the deceased person. The estate pays all the liabilities owed by the decedent and distributes them to the beneficiaries.
How does the tax calculation work?
You have:
Gross estate
– Deductions
– Exemption
= Taxable estate * % tax rate
Gross Estate
The gross estate consists of the total fair market dollar value of all assets an individual had at the time of death.
If you solely own an asset, it includes 100% of your bank accounts, investments, stocks, bonds, personal items, life insurance, business interests, real estate, and retirement accounts.
If jointly owned with survivorship (e.g., a spouse), most of these will be valued at 50% if one spouse passes.
Deductions:
After figuring out the total value, we need to subtract things like:
- Funeral expenses
- Expenses incurred in administering the estate
- Debts of the decedent
- Marital deduction
Lifetime exemption
Each U.S. citizen has a lifetime estate tax exemption that allows a tax-free transfer of assets to beneficiaries. This amount is $13.99 million in 2025.
There is a special rule for married couples, allowing a surviving spouse to use any unused portion of a deceased spouse’s exemption. This gives a couple a total of $27.98 million in 2025 (they must file an estate tax return, though).
So, many people might not hit this exemption amount and will owe $0 in federal estate taxes. However, the law can change, and the exemption amounts can also change.
In addition, many states impose their own estate tax:
The map above shows whether states have any estate or inheritance taxes.
Usually, the state exemption amounts are significantly lower than the federal exemption. For example, Illinois has a $4M exemption, or Washington D.C. has a $4.8M exemption.
Oregon, on the other hand, taxes estates that exceed $1 million.
The tax rate ranges from 18-40% on the federal level and 10-20% on the state level (if applicable).
How can you reduce the impact of estate taxes?
Some strategies:
- Gifting or funding 529 plan
The annual gift tax exclusion for 2025 is $19,000. That means you can give up to $19,000 to as many people as you want without incurring any gift tax, thereby reducing the size of your estate.
This means your children, grandchildren, cousins, etc.
You could also fund a 529 plan for your children or grandchildren; however, that counts toward the same $19,000 gift limit.
- Charitable deductions
Donating to charity can help lower the decedent’s taxable estate and support causes you are passionate about.
- Advanced strategies – GRATs and Irrevocable Trusts
These are advanced strategies, so speak to an estate lawyer. Essentially, these tools allow you to remove assets from your personal estate and place them into a trust, potentially allowing you to shift the appreciation of assets free of estate and gift taxes.
Inheritance
Generally, beneficiaries do not pay any income tax on money or property that they inherit, as that is paid as part of the estate of the deceased. However, there are some exceptions for retirement accounts, life insurance, and savings bond interest.
The IRS has a “Is the inheritance I received taxable” quiz that can help you decide.
Overall, I hope you learned something new today. Please reply to this email if you have any questions.
MC, CPA