Estate Tax
Federal tax on the transfer of assets from a decedent's estate above a statutory exemption threshold.
FAQs
Who is responsible for paying the estate tax?
The estate tax is paid by the deceased person's estate—not by individual beneficiaries receiving inheritances. The executor or personal representative of the estate is responsible for filing Form 706 (United States Estate Tax Return) within nine months of death (with a six-month extension available) and paying any tax owed from estate assets before distributing the remainder to heirs. Insufficient liquid assets to pay estate tax sometimes force estates to sell real estate or business interests under time pressure, which is why liquidity planning is a critical part of estate tax strategy.
What is portability in the context of estate tax?
Portability allows a surviving spouse to inherit the deceased spouse's unused federal estate tax exemption, effectively doubling the exemption for married couples. If a spouse dies using only $5 million of their $13.61 million exemption, the surviving spouse can add the remaining $8.61 million to their own exemption—providing $22.22 million of total protection. Portability must be elected on a timely filed estate tax return (Form 706) even if no estate tax is owed. Failing to file to elect portability permanently forfeits the unused exemption.
How is estate tax different from inheritance tax?
Estate tax is imposed on the estate of the decedent before assets are distributed to heirs; it is paid from the estate's assets. Inheritance tax is imposed on the beneficiaries who receive assets and is paid by the recipients. The federal government levies estate tax; there is no federal inheritance tax. Some states impose inheritance taxes at the state level (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania), with rates and exemptions varying by the relationship between decedent and beneficiary—spouses and children often receive exemptions or lower rates, while more distant relatives or unrelated beneficiaries face higher tax rates.
Related Terms
Gift Tax Exclusion
Annual IRS limit allowing tax-free gifts per recipient without consuming lifetime gift tax exemption.
Step-Up in Basis
Tax rule resetting an inherited asset's cost basis to fair market value at the decedent's date of death.
Estate Planning
The process of arranging for the management and distribution of assets during life and after death, minimizing taxes and ensuring wishes are carried out.
Beneficiary Designation
A legal instruction naming who receives specific account assets directly upon the account holder's death, bypassing probate.