Estate taxes remain one of the most misunderstood yet potentially significant tax burdens facing American families. While only affecting a small percentage of estates, their impact can be substantial for those unprepared. With major changes looming in 2026, understanding the current estate tax landscape in 2025 is more important than ever.
The federal estate tax exemption currently stands at a historic high of $13.99 million per individual in 2025. However, this generous exemption is scheduled to be cut nearly in half after 2025, creating a narrow window of opportunity for proactive estate planning.
In this comprehensive guide, we’ll examine both federal and state estate taxes, explain who’s affected, explore current exemptions and rates, and provide actionable strategies to minimize your potential tax burden.
Federal Estate Tax: The 2025 Landscape
Current Exemption and Rates
The Tax Cuts and Jobs Act of 2017 dramatically increased the federal estate tax exemption. Here’s what you need to know for 2025:
- Individual exemption: $13.99 million (up from $12.92 million in 2023)
- Married couples: $27.98 million combined (with proper planning)
- Tax rate: 40% on amounts exceeding the exemption
- Annual gift exclusion: $19,000 per recipient in 2025
These figures represent the highest estate tax exemptions in modern American history, adjusted annually for inflation. However, this large exemption is temporary.
The Estate Planners Tactical Guide
Essential Legal Protection for Achievers
The 2026 Exemption Reduction
Without congressional action, the enhanced exemption will expire on December 31, 2025. Starting January 1, 2026, the exemption is scheduled to revert to the pre-2018 level of approximately $7 million per individual (adjusted for inflation).
This potential halving of the exemption creates urgency for individuals with estates valued between $7 million and $14 million. Those who fail to take advantage of the current higher exemptions could face significant estate tax exposure after 2025.
Who Actually Pays Federal Estate Tax?
Despite common misconceptions, federal estate taxes affect only a tiny fraction of Americans:
- Approximately 0.1% of estates face federal estate tax liability
- In 2022, only about 2,800 estates filed taxable federal estate tax returns
- Federal estate tax revenue totals roughly $18 billion annually (0.5% of federal receipts)
Despite affecting relatively few estates, the tax can be substantial for those who do face it. Modern estate planning is essential for anyone with an estate approaching the current or future exemption amounts.
State Estate and Inheritance Taxes in 2025
States with Estate Taxes
While federal estate taxes grab headlines, state-level estate taxes can create additional tax burdens, often with much lower exemptions. In 2025, twelve states and the District of Columbia impose estate taxes:
| State | 2025 Exemption | Top Tax Rate |
|---|---|---|
| Connecticut | $12.92 million | 12% |
| Hawaii | $5.49 million | 20% |
| Illinois | $4 million | 16% |
| Maine | $6.41 million | 12% |
| Maryland | $5 million | 16% |
| Massachusetts | $2 million | 16% |
| Minnesota | $3 million | 16% |
| New York | $6.94 million | 16% |
| Oregon | $1 million | 16% |
| Rhode Island | $1.73 million | 16% |
| Vermont | $5 million | 16% |
| Washington | $2.193 million | 20% |
| District of Columbia | $4.5 million | 16% |
Recent trends show some states increasing their exemptions, but most remain significantly below the federal threshold.
States with Inheritance Taxes
In addition to estate taxes, six states impose inheritance taxes, which are levied on the recipients of an estate rather than on the estate itself:
- Iowa
- Kentucky
- Maryland (has both estate and inheritance taxes)
- Nebraska
- New Jersey
- Pennsylvania
Inheritance tax rates typically range from 0% to 16%, with rates and exemptions varying based on the relationship between the deceased and the beneficiary. Close relatives (spouses, children) often receive preferential treatment or complete exemptions.
State Tax Trends and Developments
Several noteworthy developments have occurred at the state level in recent years:
- Maine has increased its exemption by 5.7%
- New York’s exemption reached $6.94 million in 2024
- Massachusetts retroactively raised its exemption to $2 million in 2023
- Iowa is phasing out its inheritance tax by 2025
The trend suggests many states are gradually increasing exemptions or eliminating these taxes entirely, though progress varies significantly by state.
Key Differences: Estate Tax vs. Inheritance Tax
Estate Tax Fundamentals
Estate taxes are calculated based on the total value of a deceased person’s estate before assets are distributed to heirs.
Key characteristics of estate taxes include:
- Imposed on the estate itself, not individual beneficiaries
- Calculated on the fair market value of all assets over the exemption amount
- Paid from estate assets before distribution to beneficiaries
- Primary responsibility falls on the executor
The taxable estate includes all assets: real estate, investments, business interests, and personal property.
Inheritance Tax Basics
Inheritance taxes, by contrast, are levied on those who receive assets from an estate.
Important inheritance tax distinctions include:
- Imposed on individual beneficiaries, not the estate
- Rates and exemptions vary based on relationship to the deceased
- Typically exempt spouses and sometimes direct descendants
- Responsibility for payment falls on the beneficiary
- Can apply even to modest inheritances in states with inheritance taxes
Maryland is unique in imposing both estate and inheritance taxes, potentially creating a double tax burden for some estates.
The Estate Planners Tactical Guide
Essential Legal Protection for AchieversCase Study: The Johnson Family Estate
Family Profile
- Robert (72) and Linda (70) Johnson
- Total assets: $16 million ($8.5M primary residence and vacation home in Massachusetts; $7.5M investment portfolio)
- Three adult children and seven grandchildren
Tax Exposure
Federal Estate Tax (Current):
- With proper planning using both exemptions: $0 federal estate tax
- Without proper planning (all to surviving spouse first): Potential tax on $2.01M
Massachusetts Estate Tax:
- Massachusetts exemption: $2 million
- Potential Massachusetts estate tax: $1.6 million (16% of $10 million)
If No Planning Done Before 2026:
- Post-2026 federal exemption (estimated): $7 million per person
- Potential federal estate tax: $800,000 (40% of $2 million over exemption)
- Combined federal and state tax: $2.4 million
Solution Implemented
The Johnsons worked with their estate planning attorney to implement:
- Marital credit shelter trust to maximize both federal exemptions
- Annual gifting program: $19,000 to each child and grandchild annually
- Qualified Personal Residence Trust (QPRT) for vacation property
- Charitable remainder trust for appreciated securities
Outcome
- Federal estate tax eliminated entirely
- Massachusetts estate tax reduced by $720,000
- Annual gifting removed $190,000 per year from taxable estate
- Family legacy preserved with minimal tax impact
Strategies to Minimize Estate and Inheritance Taxes in 2025
Lifetime Gifting Strategies
Taking advantage of the current high exemption before the 2026 reduction is a primary strategy:
- Use the enhanced exemption: Make significant gifts now to lock in the $13.99 million exemption
- Annual exclusion gifts: Give up to $19,000 per recipient annually without using your lifetime exemption
- Direct payment exclusion: Pay educational or medical expenses directly to providers without gift tax implications
- 529 plan front-loading: Contribute up to five years of annual exclusion gifts to 529 education plans at once
The IRS has confirmed that individuals who use the current higher exemption won’t be penalized if the amount drops in 2026.
Trust Strategies for Tax Reduction
Trusts remain among the most powerful estate planning tools:
- Credit shelter trusts: Ensure both spouses’ exemptions are fully utilized
- Qualified Personal Residence Trusts (QPRTs): Transfer homes at discounted values
- Grantor Retained Annuity Trusts (GRATs): Transfer appreciation with minimal gift tax impact
- Charitable remainder trusts: Charitable trusts can generate income, receive tax deductions, and benefit charities
- Dynasty trusts: Create multi-generational wealth transfer with minimal tax impact
For those in states with estate taxes, consider establishing trusts in states without estate or inheritance taxes.
Life Insurance Strategies
Life insurance can provide liquidity to pay estate taxes while potentially reducing the taxable estate:
- Irrevocable Life Insurance Trusts (ILITs): ILITs remove insurance proceeds from taxable estate
- Second-to-die policies: Survivorship life insurance offers lower premiums, pay out when estate taxes are due
- Policy reviews: Ensure existing policies perform optimally and remain outside the taxable estate
Life insurance proceeds paid to named beneficiaries generally pass outside probate and can provide immediate liquidity for tax payments.
Business Planning Strategies
For business owners, several business succession strategies can minimize estate tax impact:
- Family limited partnerships: Transfer business interests with valuation discounts
- Buy-sell agreements: Buy Sell Agreements establish business succession plan with clear valuations
- Installment sales to intentionally defective grantor trusts: Transfer business with minimal tax impact
- ESOPs: Transition business ownership while creating liquidity
Business interests often represent the largest portion of an estate but can be the most challenging to value and liquidate.
Frequently Asked Questions
How can I determine if my estate will be subject to federal estate tax?
Calculate your net worth by adding all assets (real estate, investments, retirement accounts, business interests, personal property) and subtracting liabilities. If this amount exceeds $13.99 million as an individual or $27.98 million as a married couple, your estate may face federal estate taxes. Remember this threshold is scheduled to decrease significantly in 2026.
Does my state impose estate or inheritance taxes?
Twelve states plus DC impose estate taxes, while six states have inheritance taxes (with Maryland having both). If you live in or own property in Connecticut, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, or DC, you may face state-level estate or inheritance taxes.
What happens if I gift money to reduce my estate but die within three years?
Certain gifts made within three years of death may be “pulled back” into your taxable estate, including:
- Life insurance policies transferred within three years of death
- Gifts where you retain certain interests or control
- Certain gift taxes paid on gifts made within three years of death
However, most completed gifts remain outside your taxable estate regardless of when you die after making the gift.
How does the step-up in basis at death affect estate planning?
Assets held until death receive a “step-up” in cost basis to fair market value at death, potentially eliminating capital gains tax on appreciation during your lifetime. This creates a potential tension between lifetime gifting (to reduce estate taxes) and holding assets until death (to receive the step-up). Your specific circumstances will determine which strategy provides greater overall tax benefits.
Can moving to another state help me avoid estate taxes?
Yes, establishing domicile in a state without estate or inheritance taxes can significantly reduce your potential tax burden. Florida, Texas, Nevada, and Wyoming are popular destinations for tax-motivated moves. However, changing domicile requires more than simply buying property, you must establish genuine ties to your new state and sever connections with your previous state.
Conclusion: Acting Now Before the 2026 Changes
The current estate tax landscape offers historic planning opportunities that may disappear after 2025. With the federal exemption scheduled to drop by approximately 50% and state taxes creating additional complexity, proactive planning is essential.
Consider these action steps:
- Assess your current estate value and projected growth
- Determine exposure to both federal and state estate taxes
- Implement appropriate gifting strategies to utilize the current high exemption
- Establish necessary trusts to minimize tax impact
- Review or create business succession plans
- Consider life insurance to provide liquidity for taxes
Remember that estate planning is about more than just tax reduction, it’s about ensuring your legacy passes according to your wishes with minimal complications for your loved ones.
Don’t wait until the 2026 deadline approaches to begin planning. The most effective strategies often require time for implementation and ongoing management. Consult with qualified estate planning professionals now to protect your legacy for generations to come.
