UNDERSTANDING
ESTATE TAX

Estate tax can seem like a complex topic, but understanding the basics is crucial for effective financial planning. This article provides a clear and concise overview of estate tax, explaining what it is, how it’s calculated, and how it could affect your investment decisions.

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Understanding taxes charged on the transfer of your property after your death is an important aspect of wealth management. Breaking down the key concepts and establishing what you need to know involves getting a clear idea of how it is calculated.

Managing estate tax may also influence how you invest, from the types of assets you buy to the investment accounts you choose to hold your portfolio. This is what you need to know.

Tax treatment differs across jurisdictions.

What Is Estate Tax?

Estate tax is a levy on the transfer of property after death, the term is primarily used in the US similar taxes exist worldwide under different names like inheritance tax or death duties.

Estate planning might feel distant when you’re focused on building and managing investment strategies. But understanding how estate taxes work might help you make smarter investment choices today that benefit your loved ones tomorrow.

Defining Estate Tax

In the US, estate tax is a tax imposed on the total value of a deceased person’s assets before they’re distributed to beneficiaries. Think of it as a final tax bill that must be settled before your heirs receive their inheritance.

The tax applies to your estate’s net value—that’s everything you own minus what you owe. This includes property, investments, cash, and personal belongings. Unlike income tax that you pay throughout your life, estate tax is a one-time assessment based on your accumulated wealth at death.

Who Pays Estate Tax?

In the US, only estates valued above a $13.99 million threshold face taxation. The executor of the estate—the person legally responsible for managing the deceased’s affairs—handles the tax payment using funds from the estate itself before distributing remaining assets.

Until you reach the $13.99 million your beneficiaries will receive their inheritance without incurring federal taxes.

What Assets Are Included?

US estate tax calculations consider virtually everything you own at death. While the exact details of what assets are included vary from region to region they are likely to include:

• Financial assets: Assets in bank accounts, investment portfolios, insurance, trusts, and annuities count towards your taxable estate. They will be valued at a fair market price which won’t necessarily be what you paid for them or what their values were when you acquired them.
• Physical assets: Real estate, business interests, and personal property contribute to your estate’s gross total value.

How is Estate Tax Calculated?

Estate tax calculations follow standardized formulae set out by a tax authority, in the US the process is governed by the IRS. Calculations typically start with establishing the total asset value minus debts and exemptions, with the relevant tax rate applied to the remaining amount.

Understanding these calculations helps you estimate your potential tax liability and plan accordingly. Let’s break down each component to see how they work together.

Deductions and Credits

Several deductions exist which have the potential to reduce your estate’s taxable value before applying tax rates.

• Debts and liabilities subtract directly from your gross estate—mortgages, credit card balances, and personal loans all lower the taxable amount.
• Funeral expenses and estate administration costs also qualify as deductions.
• Charitable bequests also offer tax benefits. In the US, you can make unlimited charitable deductions, making philanthropy an effective estate planning tool. Certain business and agricultural assets may also qualify for relief.

The Estate Tax Exemption

The estate tax exemption represents the amount you can pass on tax-free. In the US, this federal exemption stands at $13.99 million per individual in 2025, meaning only very wealthy estates face federal estate tax.

It is important to also note that more than a dozen states and the District of Columbia apply their own form of tax on estates, with the terms varying from state to state.

Tax Rates and Brackets

Once an estate exceeds the exemption threshold, tax is charged on any excess amount. The US system uses progressive brackets, with federal estate tax rates ranging from 18% to 40% depending on the total taxable amount.

State-level taxes tend to be lower, with rates typically between 0.8% and 20%, but regional variations make location an important factor in estate planning.

How Estate Tax Impacts Investment Decisions

Estate tax considerations might influence how you structure your investment portfolio—what type of assets you buy, and the accounts used to hold them. One potential change to your approach might be to design your tax-efficient strategy based on post-tax returns rather than gross pre-tax returns.

Smart investors think beyond basic investment returns to consider how their investment choices affect their estate’s eventual tax burden. This forward-thinking approach shapes portfolio construction and asset allocation decisions.

Estate Planning Strategies

Effective estate planning starts with understanding your current position and future goals. Regular portfolio reviews help track your estate’s growth and rebalance strategies as needed.

Diversification serves dual purposes: managing investment risk while potentially reducing estate tax exposure. Holding assets in different structures—personal accounts, pensions, trusts—provides flexibility for tax-efficient wealth transfer. Life insurance policies written in trust can provide tax-free funds to cover estate tax liabilities.

Gifting and Trusts

Gifting during your lifetime reduces your estate’s eventual value while supporting loved ones in the near term. Tax rates change, but in the 2025 tax year, US residents could potentially provide gifts up to the value of $19,000 annually tax-free, for married couples the amount being $38,000.

Trusts offer sophisticated planning opportunities. In the US, proceeds from trusts are exempt from estate taxes as long as the trustee adheres to IRS protocols during the lifetime of that trust. Different trust types suit various objectives—discretionary trusts provide flexibility, while interest in possession trusts offer income to beneficiaries. If you are considering setting up a trust then engaging professional advice could help ensure you choose appropriate structures for your circumstances.

Working with a Financial Advisor

Estate planning complexities make seeking professional guidance an attractive option for some. Qualified advisors could help you navigate regulations while pursuing financial goals.

When selecting an advisor, seek specialists in estate planning rather than generalists. Look for relevant qualifications, prepare for meetings by gathering asset information, understanding your goals, and listing questions about tax-efficient strategies. Then carry out regular reviews to ensure your plan adapts to changing circumstances and legislation.

Final thoughts

Understanding estate tax basics today empowers you to make investment decisions that protect your wealth for future generations.

While estate tax may not be an immediate concern for everyone, understanding its implications is vital for long-term financial well-being. Taking proactive steps and seeking professional advice can help you to start creating a sound financial plan that prioritizes the net, rather than the gross amount of any wealth transfer after your death.

Visit the eToro Academy to learn how to incorporate tax planning into your investment strategy.

FAQs

What is the current estate tax exemption amount in the US?

In the US, your beneficiaries will not pay any federal estate tax unless your estate is valued at $13.99 million or more. This threshold is as of 2025 and is liable to change, and some individual states also levy estate taxes which makes it worthwhile keeping up to date with announcements from relevant tax authorities.

Are there ways to minimize my estate tax liability?

Yes, several strategies can help reduce estate tax liability, including lifetime gifting within annual allowances, establishing trusts, charitable donations, and ensuring assets like life insurance are written in trust. Professional advice helps identify the most suitable approaches for your situation.

How can I find a qualified financial advisor to help with estate planning?

Look for advisors with specific estate planning qualifications. Check official trade organization registers for authorized professionals, ask for referrals from trusted sources, and interview multiple advisors to find one who understands your needs and circumstances.

How is fair market value of assets defined?

The terms relating to establishing fair market value are set out by tax authorities. In the US, the IRS tax regulation §20.2031-1 states that FMV calculations of assets aim to establish the price at which they would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.

How long do I have to file an estate tax return in the US?

There are some exceptions to the rule, particularly if the calculations of an estate’s value include business interests, but generally speaking any estate tax return should be filed with the IRS nine months after the date of death. A six-month extension is available if requested prior to the nine-month due date and the estimated correct amount of tax is paid before the due date.