Understanding Estate, Gift, and Inheritance Tax in 2025 (4 min read)
Estate Tax in 2025
What is the Estate Tax?
The federal estate tax is a tax on your right to transfer property at your death. It applies to your estate before anything is distributed to your beneficiaries.
Federal Exemption Limits
As of 2025, the federal estate tax exemption is $13.99 million per individual or $27.98 million for married couples. This exemption covers the total value of your estate, including real estate, investments, personal property, and life insurance proceeds (if owned by you).
This means if your estate is valued below $13.99 million, your beneficiaries will not owe any federal estate taxes. However, anything above that amount is subject to a tax rate of up to 40%.
Heads-Up for 2026
This generous exemption is not permanent. It’s part of the 2017 Tax Cuts and Jobs Act, which is set to expire at the end of 2025. Starting January 1, 2026, the exemption is expected to revert to around $7 million per individual, adjusted for inflation. This rollback could significantly increase the number of estates exposed to estate taxes.
Why This Matters Now
If your estate could exceed the $7 million threshold, consider using your exemption before it shrinks. Strategies like gifting, creating trusts, or shifting assets can help lock in the current limits.
State Estate Taxes: Don’t Be Caught Off Guard
Even if you avoid the federal estate tax, your state may still impose its own estate tax.
As of 2025, 12 states and the District of Columbia levy estate taxes, often with much lower exemption thresholds:
Connecticut
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington
District of Columbia
Some states have exemption thresholds as low as $1 million. For example, Massachusetts and Oregon both have a $1 million threshold, making many middle-class families subject to state estate taxes even if they escape federal ones.
Gift Tax: Give Generously—But Know the Rules
Annual Gift Tax Exclusion
The IRS allows you to give away a certain amount of money each year to as many people as you wish, free of federal gift tax and without affecting your lifetime exemption.
In 2025, the annual gift tax exclusion is $19,000 per person. That means you can give up to $19,000 to any individual without filing a gift tax return or reducing your lifetime exemption. If you're married, you and your spouse can give $38,000 per person.
Example: If you have three children and five grandchildren, you and your spouse could gift up to $304,000 total in 2025, completely tax-free and without using any of your lifetime exemption.
Lifetime Gift Tax Exemption
Any gifts above the $19,000 annual exclusion count toward your lifetime exemption, which for 2025 is the same as the estate tax exemption: $13.99 million. You won’t owe taxes unless your total gifts exceed that amount over your lifetime.
Why Gifting Can Be Smart
By gradually transferring assets through annual gifts, you reduce the size of your taxable estate, potentially avoiding estate tax later on.
What About Exceptions to the Gift Tax?
Certain types of gifts are never subject to gift tax, regardless of amount:
Tuition and medical payments (if paid directly to the institution or provider)
Gifts to a spouse who is a U.S. citizen
Gifts to a dependent
Charitable donations
Political contributions
These exclusions can be powerful tools when used strategically.
Generation-Skipping Transfer Tax (GSTT)
The Generation-Skipping Transfer Tax applies when you transfer assets to a person more than one generation below you—such as a grandchild or great-niece. This tax is meant to prevent wealthy individuals from avoiding estate taxes by skipping a generation.
The GSTT has the same $13.99 million lifetime exemption in 2025, but it works differently:
A transfer that qualifies as a generation-skipping gift counts against both your gift/estate tax exemption and your GSTT exemption.
Once you exceed your exemption, a flat 40% tax applies to generation-skipping transfers.
GSTT is particularly relevant when setting up dynasty trusts or long-term wealth transfers. Because of its complexity, consult with a professional when planning gifts across generations.
Inheritance Tax: The Recipient Pays
Unlike estate tax (paid by the estate), inheritance tax is paid by the person receiving the inheritance. There's no federal inheritance tax, but some states do impose it.
As of 2025, six states charge inheritance tax:
Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania
Each state has different rules depending on the relationship between the deceased and the beneficiary. Typically, spouses and children are either exempt or taxed at lower rates, while distant relatives and non-relatives face higher rates.
Planning Tip: If you live in one of these states or plan to leave assets to someone who lives there, explore planning options to minimize or avoid this tax, such as lifetime gifts or trusts.
Key Takeaways for 2025 Estate Planning
Take Advantage of Today’s High Exemptions
The $13.99 million exemption won’t last forever. Use lifetime gifts, trusts, or other tools to lock in these benefits before they shrink in 2026.Consider Gifting Strategies
Make full use of the $19,000 annual exclusion to reduce your taxable estate over time. Married couples can double that figure for each recipient.Be State-Smart
Your state’s tax laws may differ dramatically from federal laws. Some states tax estates at $1 million, and others tax inheritances—plan accordingly.Review Your Estate Plan Regularly
Laws change. Family situations change. Assets grow. An annual check-in with your estate planning attorney or financial advisor ensures your strategy still fits your goals and avoids unnecessary taxes.Act Before the 2026 Sunset
Whether Congress will extend current exemptions or allow them to sunset remains uncertain. Acting now can provide security and peace of mind.
Final Thoughts
Estate planning is not just for the wealthy. Even modest estates can trigger tax consequences—especially in certain states or when passing wealth to grandchildren or non-relatives. Thankfully, many tools exist to minimize the tax burden and maximize what your loved ones receive.
By understanding the federal and state rules and making thoughtful decisions now, you can create a legacy that supports your family, reflects your values, and avoids unnecessary taxes.