Understanding Estate Tax Laws and How They Affect YouJune 12, 2025

Estate taxes often feel like a concern only for the ultra-wealthy. But that’s a dangerous misconception. As property values rise and tax exemptions fluctuate, more families find themselves unexpectedly exposed to estate taxes.

Whether you’re a homeowner, investor, or business owner, understanding how estate taxes work—and who they apply to—can help you plan smarter, protect your assets, and avoid burdening your heirs.

This guide will explain estate tax basics, federal and state rules, who is affected, and how to reduce your exposure legally.

What Are Estate Taxes?

Estate taxes are levied on the transfer of wealth at death. They’re based on the total value of your estate—the sum of everything you own at the time you pass away.

There’s often confusion between estate taxes and inheritance taxes, but they’re not the same. Estate taxes are paid by the estate itself, before assets are distributed to beneficiaries. Inheritance taxes, on the other hand, are paid by the recipient after receiving their inheritance, and they exist in only a few states.

The estate tax applies only if the value of your estate exceeds a certain exemption amount. However, different rules apply depending on whether you’re looking at federal or state estate taxes.

How the Federal Estate Tax Works

The IRS sets a high bar for the federal estate tax. As of 2024, the federal exemption is $13.61 million per person, or $27.22 million for a married couple. That means only estates exceeding this value are subject to the federal estate tax, and even then, only the amount over the exemption is taxed.

If your estate qualifies, the top federal estate tax rate is 40%.

The law also allows a surviving spouse to use any unused portion of their partner’s exemption, a provision called portability. To elect portability, the surviving spouse must file IRS Form 706 within nine months of death.

This high exemption means most people won’t pay federal estate tax—but if the exemption is reduced (as scheduled in 2026), many more families could be affected.

State Estate and Inheritance Taxes

Federal estate tax is only one piece of the puzzle. Many states have their own estate or inheritance taxes, and their thresholds are much lower.

Currently, states with estate taxes include Oregon, Massachusetts, Connecticut, Washington, and several others. These states often have exemptions as low as $1 million.

A handful of states—such as Nebraska, Iowa, Kentucky, and Maryland—also impose inheritance taxes on recipients. Maryland is the only state with both estate and inheritance taxes.

If you live or own property in these states, your estate could be taxed even if it falls below the federal threshold.

The interaction between federal and state laws can complicate estate planning. A strategy that works for federal taxes may not be enough to avoid state-level exposure.

Who Is Affected by Estate Taxes?

High-Net-Worth Individuals

Business owners, real estate investors, and individuals with sizable investment portfolios are the most obvious targets. If your estate is nearing or exceeds the federal exemption limit, you are a likely candidate for estate tax liability.

Even if you’re below the federal level, you may be exposed at the state level—especially in places like Oregon or Massachusetts, where the threshold is just $1 million.

Married Couples

Married couples benefit from combined exemptions if they plan properly. By electing portability and using credit shelter trusts, couples can protect up to double the individual exemption. But without planning, the surviving spouse may lose part of the exemption.

Middle-Class Families in High-Tax States

Families with modest estates may still face estate taxes due to lower state thresholds. For example, a homeowner in Massachusetts with property and retirement savings totaling $1.5 million could face state estate taxes despite being below the federal level.

What’s Included in Your Taxable Estate?

Your taxable estate includes nearly everything you own at the time of death:

• Real estate (primary residence, vacation homes, rental properties)
• Bank accounts and investment portfolios
• Retirement accounts (IRA, 401(k), etc.)
• Business ownership interests
• Personal property (vehicles, jewelry, art, collectibles)
• Life insurance proceeds (if you own the policy)

A major surprise for many people is that life insurance is typically included in the estate if the deceased owned the policy. This can inflate the estate’s value and create unexpected tax exposure.

Jointly owned property and assets with designated beneficiaries may also be included, depending on how ownership and rights are structured.

How to Reduce or Avoid Estate Taxes Legally

Gifting Strategies

The IRS allows you to give up to $18,000 per recipient per year (in 2024) without using your lifetime exemption. These gifts can reduce your estate over time.

You can also tap into your lifetime gift and estate tax exemption. Every dollar you give above the annual exclusion reduces your lifetime exemption, but it removes assets from your taxable estate.

Gifting early, especially for assets likely to appreciate, is a powerful way to shift wealth to the next generation tax-efficiently.

Trusts

Trusts are key tools for estate tax reduction. Here are some common types:

• Irrevocable Life Insurance Trusts (ILITs): Exclude life insurance proceeds from your estate.
• Grantor Retained Annuity Trusts (GRATs): Allow you to transfer appreciating assets to heirs with minimal gift tax.
• Charitable Remainder Trusts (CRTs): Provide income to you or your heirs, with the remainder going to charity. Reduce both income and estate taxes.

Family Limited Partnerships (FLPs)

FLPs allow you to transfer business or investment assets to family members at a discounted value while retaining control. This can lower the taxable value of your estate and keep assets within the family.

Charitable Giving

Donating to charity is not only fulfilling—it can also reduce your taxable estate. Charitable lead trusts and donor-advised funds let you structure giving for maximum impact and tax benefit.

Estate Tax Planning for Business Owners

Business owners face unique challenges. A large portion of their wealth is often tied up in the business, making it difficult to access liquidity for estate taxes.

A formal business valuation is critical. The IRS will require one for estate tax reporting, and it ensures your succession plan reflects the true value of the business.

A buy-sell agreement, often funded by life insurance, allows for orderly transitions and provides liquidity to heirs or partners. Without this, the business may need to be sold or dismantled to pay estate taxes.

Preparing Your Estate Plan for Tax Efficiency

No plan is complete without coordination between documents and professionals. Work with an estate planning attorney, CPA, and financial advisor to ensure your plan covers:

• Wills and trusts
• Powers of attorney and healthcare directives
• Beneficiary designations
• Tax planning for both federal and state rules

Review your plan regularly—especially after major life events like marriage, divorce, birth of a child, or changes in the law.

Frequently Asked Questions

What is the difference between estate tax and inheritance tax?
Estate tax is levied on the estate before distribution. Inheritance tax is paid by the recipient after receiving assets. Only a few states impose inheritance taxes.

How do I know if my estate will be taxed?
If your estate exceeds the federal exemption ($13.61 million in 2024) or your state has its own tax with a lower threshold, you could be subject to estate tax.

Can I give away assets to avoid estate tax?
Yes. Strategic gifting reduces the size of your estate. Gifts under the annual exclusion limit don’t count against your lifetime exemption.

Does life insurance count toward estate taxes?
If you own the policy, yes—it’s included in your estate. To avoid this, place the policy in an irrevocable life insurance trust.

What happens if I die without an estate plan?
Your estate will go through probate. Assets are distributed according to state law, not necessarily your wishes. Estate taxes may apply without optimization.

Conclusion

Estate taxes can dramatically affect the legacy you leave behind. While most Americans are currently exempt from federal estate taxes, many are vulnerable at the state level—or could become so if federal laws change.

Understanding how these taxes work and who they impact is the first step toward preserving your assets. Whether through gifting, trusts, or business planning, there are proven strategies to reduce or eliminate estate tax burdens.

Start early. Work with qualified professionals. And review your plan often. That way, you can protect what you’ve built—and pass it on the way you intended.

Please contact Lynn Conover at lconover@curchin.com with any additional questions or feedback regarding Estate Planning.