What Is Estate Tax? Who Pays And How It Works

Anna Burton is a lead planning excellence consultant at Northwestern Mutual.

If you’re estate planning—designating beneficiaries, selecting charities for donations, preparing to leave a legacy—it’s important to understand how the wealth you pass on can be affected by estate taxes. After all, you’ve worked hard to build your wealth and probably want as much as possible to reach your loved ones. In fact, our 2025 Planning & Progress study found that 88 percent of Americans planning to leave an inheritance say it's an important financial goal.

Below, you’ll learn what the estate tax is, how it works, federal and state tax rates, and how the estate tax differs from the inheritance tax. You’ll also read about strategies that could limit the impact of estate taxes on your legacy.

What’s estate tax?

It’s when an estate (or what is owned by someone at the time they pass away) is taxed. It comes into play only when the estate’s value exceeds a certain limit. Estate taxes can apply at the federal and/or state levels. It all depends on where you live, the size of your estate and other factors.

Who pays estate tax?

This tax is paid by the estate of the person who passed away, before any assets are distributed to the estate’s beneficiaries. So, the estate’s beneficiaries don’t directly pay estate tax, though it may reduce how much they inherit.

It works like this. First, the fair market value of all assets held by the estate must be calculated. Estate taxes will be due only if this value exceeds exemptions at the federal or state level. The estate’s executor is then responsible for filing tax returns for the estate and paying any estate taxes due. The remainder of the estate, less any outstanding debt, can then be given to the estate’s beneficiaries.

This works differently from an inheritance tax, which is paid directly by an heir who receives assets from an estate.

Estate tax vs. inheritance tax

While the estate tax is often discussed alongside inheritance taxes, there are important differences between the two to consider, as described below:

How do federal estate taxes work?

Federal estate tax is applied only if the value of an estate exceeds the individual’s lifetime estate tax exemption amount. This amount is adjusted annually for inflation and is $13.99 million per person for the 2025 tax year and $15 million for 2026.

For reference, here are the federal lifetime estate tax exemption limits from 2022 through 2026.

2022: $12,060,000

2023: $12,920,000

2024: $13,610,000

2025: $13,990,000

2026: $15,000,000

When it comes to the question of federal inheritance tax, there currently is none. At the state level, a few states do impose inheritance tax.

Which states have estate tax?

Your legacy may also be subject to estate taxes at the state level if you live in one of the 12 states (or the District of Columbia) that currently have one. Each state that collects an estate tax is free to determine exemptions and rates for itself, and it’s important to note that the state exemption limit may be lower than the federal exemption limit.

While state estate taxes are deductible from a federal estate tax perspective, estates that are well under the federal estate tax threshold could still be on the hook for state estate taxes. These tend to have lower thresholds.

​​​These are states with an estate tax:

• Connecticut: $13,990,000 exemption limit, 12% estate tax rate
• Hawaii: $5,490,000 exemption limit, 10-12% estate tax rate
• Illinois: $4,000,000 exemption limit, 0.8-16% estate tax rate
• Maine: $7,000,000 exemption limit, 8-12% estate tax rate
• Maryland: $5,000,000 exemption limit, 0.8-16% estate tax rate
• Massachusetts: $2,000,000 exemption limit, 0.8-16% estate tax rate
• Minnesota: $3,000,000 exemption limit, 13-16% estate tax rate
• New York: $7,160,000 exemption limit, 13-16% estate tax rate
• Oregon: $1,000,000 exemption limit, 10-16% estate tax rate
• Rhode Island: $1,802,431 exemption limit, 0.8-16% estate tax rate
• Vermont: $5,000,000 exemption limit, 16% estate tax rate
• Washington: $3,000,000 exemption limit, 10-35% estate tax rate
• District of Columbia (D.C.): $4,873,200 exemption limit, 11.2-16% estate tax rate

Which states have inheritance tax?

By comparison, five states (Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) have an inheritance tax in place, with rates ranging from 1 to 16 percent. Iowa previously charged an inheritance tax, but this was repealed for inheritances received after January 1, 2025. As a reminder, inheritance tax is paid directly by an heir who receives assets from an estate.

Which assets are subject to estate tax?

Most assets that contribute to your net worth make up your estate upon your death and are subject to estate taxes. This can include things like the following:

• Cash and checking and savings account balances
• Real estate, vehicles and other personal property (like jewelry, art, collectibles)
• Retirement accounts and other investment accounts
• Stocks, bonds, mutual funds, certificates of deposit (CDs), private equity and other investments
• Business interests (for example, ownership in a business)
• Certain insurance policies
• Some trusts and annuities

Which assets aren’t subject to estate tax?

While many assets go into your estate and can be subject to estate taxes, there are a number of situations in which this can be avoided. Here are some assets that are typically not subject to estate taxes:

Assets left to a spouse

When you leave assets to your spouse or name your spouse as a beneficiary on an account, they will typically not be subject to estate taxes. That’s due to the ​​unlimited marital deduction, which allows you to transfer an unlimited amount of assets to your spouse—at death or even while you’re still alive—without triggering federal estate taxes. Upon your spouse’s death, any remaining assets could be subject to estate taxes. And you may use any of your spouse’s unused estate tax exemption through a process called “portability.”

Life insurance proceeds paid to a beneficiary

If you have a life insurance policy, the death benefit usually won’t be subject to estate taxes. The money typically reaches your beneficiaries to use in any way they’d like.

Assets held in an irrevocable trust

You can create a variety of irrevocable trusts, which can effectively exclude assets from your estate. Once the assets are no longer considered a part of your estate, they won’t be subject to estate taxes upon your death. (This favorable tax treatment doesn’t apply to revocable trusts.) There are many different ​​types of trusts to consider leveraging, each of which may be better suited for different purposes. So, you should think carefully about which may best align with your estate planning goals. Some to consider include these:

• Irrevocable life insurance trust (ILIT)
• Irrevocable marital trust
• Irrevocable special needs trust
• Irrevocable dynasty trust

Does debt affect estate tax?

Debt doesn’t directly affect estate taxes, but it may indirectly reduce how much tax your estate incurs upon your death. Before the estate is taxed, the estate’s assets are used to settle any debts owed by the estate via the estate settlement process (including probate). This effectively lowers the value of the estate—which also lowers the amount of taxes that the estate must pay.

Minimizing the impact of estate taxes

If your estate is likely to exceed the exemption when you or your spouse pass away, you can follow some strategies now to minimize the impact. Naming your spouse as a beneficiary to key accounts, transferring ownership of your life insurance policy or creating irrevocable trusts might be options.

When you’re ready to plan for your estate, talk with your Northwestern Mutual financial advisor. They can ask deep questions to understand your goals. Then you can work together to craft a strategy aligned with those goals.

Your advisor can also look at your investments alongside your insurance to see your whole financial picture. They will point out opportunities and blind spots that might otherwise get overlooked.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.