Estate tax

What is estate tax and how does it differ from inheritance tax?

Estate tax and inheritance tax are two structurally different mechanisms for taxing wealth-transfer at death. Estate tax is paid by the decedent's estate from estate assets before distribution to beneficiaries — the tax base is the gross estate, the taxable person is the estate, and the calculation runs once per decedent regardless of how many beneficiaries inherit. Inheritance tax is paid by each beneficiary on the value of what they personally receive from the decedent — the tax base is the inheritance received, the taxable person is the recipient, and the calculation runs separately for each beneficiary, typically with rate variation by relationship-to-decedent (spouse / child / sibling / unrelated). The United States, United Kingdom, and a handful of US states operate estate-tax frameworks; France, Germany, Spain, Belgium, Italy, the Netherlands, and Japan operate inheritance-tax frameworks. The economic incidence overlaps but the legal mechanics differ materially [SC1].

How does the US federal estate tax work?

The US federal estate tax under IRC §2001 is imposed on the taxable estate of a US citizen or resident decedent at progressive rates topping at 40 percent on amounts above the unified credit equivalent. For 2025, the unified credit shelters approximately USD 13.99 million of taxable estate (USD 27.98 million for a married couple via portability of the deceased-spouse's unused exemption) [SC1]. The TCJA-era doubled exemption is scheduled to sunset on 31 December 2025 absent Congressional action — reverting to approximately USD 7 million inflation-adjusted from 1 January 2026, materially expanding the population of estates subject to the tax. The estate-tax return (Form 706) is due 9 months after the date of death with a 6-month extension available. The marital deduction under IRC §2056 fully exempts assets passing to a surviving US-citizen spouse; the charitable deduction under IRC §2055 fully exempts assets passing to qualifying charities. Non-citizen-spouses face a USD 60,000 exemption (USD 175,000 indexed for 2025) and a 40 percent rate on excess, mitigated by Qualified Domestic Trusts (QDOTs) under IRC §2056A. Non-resident-aliens are taxed on US-situs assets only with a USD 60,000 exemption (treaty-modified for some jurisdictions).

How does state-level estate and inheritance tax interact?

The US has 17 jurisdictions that impose state-level estate or inheritance tax in addition to (or instead of) the federal estate tax: 12 states + DC have estate taxes, 6 states have inheritance taxes, and Maryland operates both [SC1]. State estate-tax exemptions are typically materially lower than the federal: Massachusetts USD 2 million; Oregon USD 1 million; Minnesota USD 3 million; Washington USD 2.193 million; New York USD 6.94 million (2024 figure, indexed). Connecticut and Maine align their exemptions with the federal level; the rest set their own. Inheritance-tax states (Pennsylvania, Kentucky, Maryland, Nebraska, New Jersey, Iowa) impose graduated rates by relationship — typically zero on spousal transfers, low rates on children, higher on siblings, highest on unrelated beneficiaries. Estate planning in multi-state-asset situations involves apportionment under each state's domicile and situs rules.

How does UK Inheritance Tax compare?

The UK Inheritance Tax (IHT) regime is structurally an estate tax despite the name — the tax is paid by the executor of the estate from estate assets before distribution, with a 40 percent rate applying to the chargeable estate above the Nil-Rate Band of GBP 325,000 [SC2]. The Residence Nil-Rate Band adds up to GBP 175,000 of additional shelter where the estate includes a qualifying residence passing to direct descendants, with taper above GBP 2 million estates. The combined NRB + RNRB shelter is GBP 500,000 per individual, GBP 1 million for a married couple (with portability between spouses). The spouse exemption is unlimited where both spouses are UK-domiciled; limited to GBP 325,000 where the inheriting spouse is non-UK-domiciled. Lifetime gifts within 7 years of death are aggregated into the chargeable estate (Potentially Exempt Transfers); gifts beyond 7 years are exempt. Business Property Relief and Agricultural Property Relief provide 50 percent or 100 percent reduction for qualifying business and farming assets — substantial planning levers used widely by UK-resident high-net-worth families. The IHT system is the most complex wealth-transfer-tax regime in the OECD.

How do continental European inheritance taxes work?

Most continental European jurisdictions operate inheritance-tax (or gift-and-inheritance) frameworks rather than estate taxes. France: Droits de succession with rates 5–45 percent for direct descendants (graduated bands above EUR 100,000 abatement per parent-to-child pair); 35–45 percent for siblings; 55 percent for nephews/nieces; 60 percent for unrelated. Germany: Erbschaftsteuer with rates 7–50 percent in three tax classes — Class I (spouse, children, grandchildren) 7–30 percent; Class II (siblings, in-laws) 15–43 percent; Class III (unrelated) 30–50 percent. Class I exemption EUR 500,000 spouse / EUR 400,000 per child / EUR 200,000 per grandchild. Spain: Impuesto sobre Sucesiones y Donaciones — autonomous-community-level with material variation; some communities (Madrid, Andalucía post-2022) effectively eliminate the tax via 99 percent reductions; others retain rates of 7.65–34 percent with graduated multipliers. Belgium: Droits de succession at regional level (Flemish, Walloon, Brussels) with rates up to 65 percent for unrelated beneficiaries. Italy: Imposta sulle successioni e donazioni at flat 4 percent (spouse/children, EUR 1 million exemption per beneficiary), 6 percent (siblings, EUR 100,000 exemption), 8 percent (others, no exemption) — among the lowest rates in the OECD. Netherlands: Erfbelasting at 10–40 percent depending on relationship. Japan: Inheritance Tax at 10–55 percent — among the highest top rates globally — with substantial pre-planning incentives.

Which jurisdictions have neither estate nor inheritance tax?

A significant set of major economies has abolished or never implemented inheritance/estate tax: Australia (abolished 1979); Canada (no estate or inheritance tax — a deemed-disposition capital-gains tax under section 70(5) ITA applies on death assets, structurally different from a transfer tax); New Zealand (abolished 1992); Sweden (abolished 2005); Norway (abolished 2014); Russia (abolished 2006); India (abolished 1985 via Estate Duty Act repeal); Israel (no inheritance tax, though section 1 ITO catches certain post-2003 emigration-related transfers); Singapore (Estate Duty Act repealed for deaths from 15 February 2008); Hong Kong (Estate Duty Act repealed for deaths from 11 February 2006); United Arab Emirates (no individual income tax means no estate or inheritance tax); Mexico (no inheritance tax at federal level; some states have minor transfer taxes). The list is long enough that practitioners commonly view inheritance/estate tax as a feature of a minority of major economies rather than a universal norm. The post-2000 trend has been toward repeal in former-USSR and Anglo-Commonwealth jurisdictions, with EU continental economies retaining the regime as a high-yield wealth-transfer tax.

How do treaties address estate and inheritance tax?

A small number of countries maintain bilateral estate-tax conventions distinct from the income-tax-treaty network. The US has approximately 16 estate-and-gift-tax treaties in force, principally with European jurisdictions (UK, France, Germany, Italy, Netherlands, Switzerland, Denmark, Greece, Ireland, Norway, Austria, Finland, Sweden) plus Australia, Canada, Japan, and South Africa [SC1]. These treaties provide tie-breaker rules on deemed-domicile status, foreign-tax-credit relief, and reduced situs-rule application. Where no estate-tax treaty applies, the US-domestic credit under IRC §2014 provides foreign-estate-tax relief on US-situs assets that have been doubly taxed. France maintains a similar bilateral inheritance-tax treaty network. The income-tax-treaty network does not generally extend to estate or inheritance tax — these are separate bilateral instruments where they exist.

What planning structures are commonly used?

Common approaches discussed by practitioners include several recurring planning structures. Lifetime gifting: progressive use of the annual gift exclusion (US USD 18,000 per donee for 2024, indexed) and the lifetime unified exemption to shift assets out of the taxable estate during the donor's lifetime, with grantor-trust mechanics to shift income-tax burden to the grantor while assets sit outside the estate. Irrevocable Life Insurance Trusts (ILITs): hold life-insurance policies outside the gross estate, providing liquidity to pay estate tax without inflating the estate. Spousal Lifetime Access Trusts (SLATs): each spouse creates a SLAT for the other, capturing the doubled exemption ahead of TCJA sunset while retaining indirect spousal access to assets. Grantor Retained Annuity Trusts (GRATs): low-interest-rate planning to shift appreciation outside the estate at minimal gift-tax cost. Charitable Remainder Trusts and Charitable Lead Trusts: combine philanthropic intent with estate-tax reduction. Family Limited Partnerships and LLCs: discount valuation through restrictions on transferability and lack of marketability, with continuing IRS scrutiny under IRC §2036. UK-specific structures include the use of Business Property Relief on family-business interests held >2 years, Agricultural Property Relief on farmland, and the Excluded Property Trust for non-UK-domiciled settlors with non-UK-situs assets. The choice depends on family structure, asset base, and projected estate size relative to applicable exemptions.