Estate and inheritance taxes, sometimes lumped together as death taxes, apply only to a small slice of estates, but if you are wondering how to reduce inheritance tax exposure for your family, the answer usually comes down to timing, gifting and a handful of legal tools available well before anyone dies. This guide walks through how the federal system works, which states add their own layer, and what actually moves the needle on your tax bill.
At a Glance
- The federal estate tax in 2023 only applies to estates worth more than $12.92 million, rising to $13.61 million in 2024.
- Twelve states plus the District of Columbia charge their own estate tax separate from the federal one.
- Six states charge an inheritance tax, though spouses are exempt in every one of them.
- Irrevocable trusts, lifetime gifting and charitable giving are the main levers people pull to reduce what's owed.
- The unlimited marital deduction lets couples push the tax bill off until the second spouse dies.
What Counts as a Death Tax
Death tax is really an umbrella term covering two different things: estate tax and inheritance tax. With an estate tax, the deceased person's estate settles the bill before anything reaches the heirs. With an inheritance tax, the person who receives the assets pays instead. The phrase itself picked up steam in the 1990s among critics pushing to have these taxes repealed altogether, and it stuck around in everyday use even though tax attorneys tend to stick with the more precise terms.
The federal government only taxes estates, not inheritances, and the rate runs from 18 percent to 40 percent depending on how much of the estate sits above the exemption threshold. Separately, twelve states, including Connecticut and New York, run their own estate tax systems on top of whatever the IRS collects.
Inheritance Tax at the State Level
No federal inheritance tax exists, but six states still collect one: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In every one of those states, assets passing to a surviving spouse are exempt, so widows and widowers are not on the hook. Nebraska and Pennsylvania go a step further and, in certain cases, tax property left to children or grandchildren too.
How the 2023 and 2024 Exemption Limits Work
Very few families actually owe federal estate tax, largely because the 2017 Tax Cuts and Jobs Act pushed the exclusion amount so high. In 2023 that threshold sits at $12.92 million per person; in 2024 it climbs to $13.61 million. Only the portion of an estate above that line gets taxed.
Say someone leaves a $13 million estate to their children, has never given gifts exceeding the lifetime exclusion, and dies in 2023. The taxable slice is $13 million minus $12.92 million, or $80,000. Under the Unified Rate Schedule, that amount is taxed at 28 percent plus a base tax of $18,200, which works out to (28% x $80,000) + $18,200, or $40,600 owed. If the estate's total value falls under the exemption for that year, no federal estate tax is due at all.
One thing worth flagging: the Tax Cuts and Jobs Act provisions expire after 2025. Unless Congress renews them, the exclusion amount is set to fall, possibly back down toward roughly $5 million, which would pull many more estates into taxable territory.
Ways to Reduce Inheritance Tax and Estate Tax Exposure
For the relatively small number of families who expect to cross the exemption threshold, several legitimate strategies exist to lower or sidestep the bill.
- Set up an irrevocable trust: Moving assets into an irrevocable trust removes them from your taxable estate. A grantor retained annuity trust, or GRAT, is a commonly used vehicle that lets the trust pay out income to you and your beneficiaries over time.
- Give assets away during your lifetime: You can gift money or property to relatives and friends tax free as long as the total stays under the lifetime exclusion, $12.92 million per person in 2023 ($25.84 million for a married couple), or $13.61 million ($27.22 million combined) in 2024.
- Spend it: Some advisors simply suggest giving enough away that your family is secure, then using the rest of the money rather than leaving a taxable pile behind.
- Donate to charity: Charitable gifts reduce the taxable value of your estate and can be deducted, while also supporting causes you care about.
The Unified Tax Credit and Marital Deduction
The unified tax credit folds gift tax and estate tax into one combined system, so any lifetime gifting counts against the same exclusion you'd otherwise use at death. It reduces your eventual tax bill dollar for dollar, and some people intentionally save the credit for after death rather than using it to offset gift taxes while still alive.
The unlimited marital deduction works differently. It allows one spouse to transfer any amount of assets to the other, at any time, including at death, without triggering federal estate or gift tax. Effectively, the IRS treats married couples as a single economic unit. This doesn't erase the tax, it postpones it: once the surviving spouse dies, whatever remains above that year's exclusion amount becomes part of their own taxable estate, unless it's been spent or gifted away in the meantime.
Weighing the Tradeoffs
There's a case for and against the current system. On the plus side, the threshold is high enough that only very wealthy estates are affected, and the tax brings in real money. Through the fiscal year to date as of July 21, 2024, the federal government had collected $25 billion from estate and gift taxes combined.
On the downside, critics point out that estates large enough to owe this tax are effectively taxed twice: once through income tax during the person's life, and again through the estate tax at death. There's also the fact that wealthy families with access to trusts, gifting strategies and skilled advisors can often reduce or eliminate what they owe, which strikes some observers as an unfair advantage baked into the system.