What is estate tax?

Estate tax is a federal or state tax on property that a person owns at death and is transferred to another person or entity through a will or through the state laws that govern the assets of people who die without a will, called intestacy laws. Everything a person owns at death, including cash, stock, real estate, insurance proceeds and business interests, comprises the person's estate.

Under federal tax laws, an estate tax is assessed only if the estate is worth more than a certain threshold amount. Every year, the Internal Revenue Service determines the size of the estates whose owners must file an estate tax return and pay estate tax. For example, in 2014, the IRS set the threshold for filing an estate tax return at $5,340,000, so owners of estates worth less than this amount were exempt from filing an estate return or paying a transfer tax. Comparatively, the IRS set a lower threshold of $5,120,000 in 2012.

Even if an estate is small enough to avoid federal estate taxes, it may be subject to state-based estate or inheritance tax. Some states tax the entire estate, regardless of size, while others set a threshold amount before the tax becomes due. Most states exempt estates from taxation if the estate is left to a surviving spouse.