What the federal estate tax is charged on
The estate tax is a tax on the transfer of property at death, paid by the estate before anything reaches the beneficiaries. It is not an inheritance tax; beneficiaries do not report their inheritance as income, and the tax does not vary with who receives what except where the marital or charitable deduction applies.
The base is the gross estate, which is broader than most people expect. It includes property you owned outright, your share of jointly held property, retirement accounts, and life insurance proceeds on your own life if you held any incident of ownership in the policy — a point that catches families out constantly, because a policy paid to a named beneficiary avoids probate but is still in the taxable estate. Property in a revocable living trust is included too: revocable trusts avoid probate, not estate tax.
From the gross estate you deduct debts, funeral and administration expenses, charitable bequests without limit, and the marital deduction, also without limit where the surviving spouse is a U.S. citizen. What remains is the taxable estate. Add adjusted taxable gifts — lifetime gifts above the annual exclusion, which are pulled back into the calculation because the estate and gift taxes are a single unified system — and compare the total with the applicable exclusion.
Why the arithmetic is simpler than the statute
The statutory method computes a tentative tax on the whole base using a graduated rate table and then subtracts a unified credit equal to the tax that would be due on the exclusion amount. That is more machinery than the result requires. Because the exclusion sits far above the level at which the top bracket takes over, the graduated brackets are entirely consumed by the credit and every dollar above the exclusion is taxed at the top marginal rate. Subtracting first and multiplying by that rate gives exactly the same number with two fewer steps.
The applicable exclusion has two parts. The basic exclusion amount is set by statute, indexed for inflation, and has moved repeatedly — which is why it is an input on this page rather than a constant. Added to it is any deceased spouse's unused exclusion, the portability amount. Portability lets a surviving spouse inherit whatever exclusion the first spouse did not use, effectively doubling the shelter for a married couple, and it is the single most valuable election in estate administration. It is also the one most often lost, because claiming it requires filing a complete and timely Form 706 for the first spouse's estate even when that estate owed no tax at all. Families routinely skip that filing because there is nothing to pay, and discover the cost years later.
The marital deduction is a deferral, not an exemption. Everything passing to a surviving spouse escapes tax in the first estate and is taxed in the second. Leaving everything to a spouse and making no portability election is the classic planning failure: it wastes the first spouse's entire exclusion.
The charitable deduction is different in kind, because the money genuinely leaves the family. On an estate already above the exclusion, a dollar to charity reduces the tax by the top rate in cents, so at a 40% rate the net cost to the beneficiaries is 60 cents per dollar given. That is the correct way to think about the trade, and it only applies to estates already over the line — below it, a charitable bequest costs the beneficiaries the full dollar.
Worked example: a $22 million estate
The decedent leaves a gross estate of $22,000,000. Debts and administration expenses come to $750,000. There is a $1,500,000 bequest to a university and no surviving spouse. During life the decedent made $500,000 of taxable gifts above the annual exclusion. The basic exclusion amount for the year of death is $15,000,000 and there is no portability amount.
- Total the deductions. $750,000 + $1,500,000 + $0 = $2,250,000.
- Taxable estate. $22,000,000 − $2,250,000 = $19,750,000.
- Add lifetime gifts. $19,750,000 + $500,000 = $20,250,000.
- Applicable exclusion. $15,000,000 + $0 = $15,000,000.
- Amount above the exclusion. $20,250,000 − $15,000,000 = $5,250,000.
- Federal tax. $5,250,000 × 40% = $2,100,000.
- Effective rate on the gross estate. $2,100,000 ÷ $22,000,000 = 9.55%, far below the 40% headline rate, because the first $15,000,000 of base is untaxed.
- Net to beneficiaries. $19,750,000 − $2,100,000 = $17,650,000.
Notice what the $500,000 of lifetime gifts did. It did not escape tax; it was added straight back into the base. Gifting reduces estate tax only through the growth that occurs after the gift, and through the annual exclusion amounts that never enter the calculation at all. A gift made and then included at its original value is tax-neutral by design.
How to read the result
Compare the effective rate against the top rate. The gap between them is the whole story of the estate tax: a headline rate of 40% produces an effective rate under 10% on this estate, because the exclusion shelters the base before any rate applies. As the estate grows the effective rate climbs toward the top rate but never reaches it.
Then look at the amount above the exclusion, because that is the only figure any planning strategy can move. Reducing it works through three levers: giving assets away early enough that the growth happens outside the estate, giving to charity, or discounting the value of what is included through legitimate valuation techniques for closely held interests. Reducing the gross estate by consuming assets is the fourth and least popular.
Check the state line separately. Federal liability is not a prerequisite for state liability, and in several states the exemption is a small fraction of the federal one. An estate comfortably inside the federal exclusion can owe a substantial state estate tax, and a handful of states levy an inheritance tax on the recipients instead, charged at rates that depend on the relationship between the beneficiary and the decedent. The flat rate on this page is a stand-in for a graduated schedule, so treat the state figure as an order of magnitude rather than a return.
Finally, remember what is not here: the generation-skipping transfer tax, which applies its own exemption to transfers to grandchildren and below and can stack on top of the estate tax; state inheritance taxes; and income tax on income in respect of a decedent, which is what makes a traditional retirement account a worse asset to leave than its balance suggests.
Marginal and effective rate as the estate grows
| Taxable estate | Above the exclusion | Federal tax | Effective rate |
|---|---|---|---|
| $15,000,000 | $0 | $0 | 0.00% |
| $20,000,000 | $5,000,000 | $2,000,000 | 10.00% |
| $25,000,000 | $10,000,000 | $4,000,000 | 16.00% |
| $40,000,000 | $25,000,000 | $10,000,000 | 25.00% |
| $75,000,000 | $60,000,000 | $24,000,000 | 32.00% |
| $150,000,000 | $135,000,000 | $54,000,000 | 36.00% |
Every row is 0.40 x (estate - 15,000,000) and then that figure divided by the estate. The effective rate approaches 40% from below and never reaches it, because the exclusion is always untaxed.
What gets left out of a gross estate by mistake
- Life insurance you own on your own life. The death benefit is in the gross estate if you held any incident of ownership. An irrevocable life insurance trust is the standard answer, and it has to be set up well before death.
- Assets in a revocable living trust. Revocable trusts avoid probate and do nothing for estate tax, because you retained control.
- Retirement accounts. The full balance is in the estate, and the beneficiary then pays income tax on withdrawals as well. A traditional IRA is one of the most heavily taxed assets to leave.
- Jointly held property. Between spouses, generally half. With anyone else, the full value unless the survivor's contribution can be proved.
- Gifts made within three years of death. Certain transfers, notably life insurance, are pulled back into the estate under the three-year rule.
- Business interests valued casually. Closely held interests need a qualified appraisal. Valuation discounts for lack of control and marketability are legitimate and heavily scrutinised.
The other numbers an executor needs
Estate tax is one of several costs an estate carries, and often not the largest for estates below the exclusion. Administration is the one everybody pays: the probate fees and executor compensation calculator prices the statutory and negotiated fees that come out of the probate estate before distribution, and those fees are themselves deductible here as administration expenses.
On the income tax side, the estate's assets generally receive a stepped-up basis at death, which is why a lifetime gift of appreciated property can be worse than leaving it: the recipient of a gift takes your basis, while the recipient of a bequest takes the date-of-death value. Run the difference through the capital gains tax calculator before making a large lifetime transfer of appreciated assets. Beneficiaries inheriting retirement accounts face their own timetable, and the inherited IRA RMD calculator handles the distribution rules that apply to them.
If the estate is insolvent rather than taxable, the analysis is entirely different: creditors are paid in statutory order and beneficiaries receive nothing, and the debt settlement versus bankruptcy calculator covers the arithmetic for a living debtor facing the same problem. Where a family business is the bulk of the estate and the tax is unaffordable in cash, the code allows a deferred instalment payment of the tax attributable to that interest — ask about it before selling the business to pay the tax.
File the return even when no tax is due
Two filings routinely get skipped and cost families a great deal. The first is Form 706 for a first spouse's estate solely to elect portability: without it, the unused exclusion is lost forever, which on a $15,000,000 exclusion is worth $6,000,000 of tax at 40%. The second is a state estate tax return in a state whose exemption is far below the federal one. Both are due nine months after death, extendable by six months on request, and both are far cheaper to file than to fix.