Inheritance Tax in the United States

What Is Estate Tax?

Estate tax in the United States is a tax levied on the transfer of assets after the death of an individual. While there is no federal inheritance tax, a federal estate tax exists, and certain states may impose additional estate or inheritance taxes. These taxes can be substantial, so it is crucial to understand the relevant laws and consult a tax professional if you are required to pay estate tax. A tax expert can help explore options for reducing your tax burden and offer a general assessment of your estate.

When Is Estate Tax Collected, and What Is Its Scope?

The federal estate tax applies to estates located within the United States, regardless of whether the deceased was a U.S. citizen. The estate tax can be significant, often comprising a large portion of the estate’s value. In comparison to other countries, including Israel, estate tax in the U.S. can be much higher.

In addition to the federal estate tax, state-specific estate taxes may apply. These vary significantly by state, so it’s important to consult local tax laws to understand potential state-level obligations.

Estate Tax vs. Inheritance Tax

It’s important to understand the distinction between estate tax and inheritance tax:

• Estate Tax is levied on the total value of the estate before distribution to heirs. It applies to the estate itself, not to the individuals inheriting the assets.
• Inheritance Tax, which exists only in a few states, is imposed on the heirs based on the value of their inheritance. The tax rate depends on the heir’s relationship to the deceased and the amount inherited.

The U.S. does not have a federal inheritance tax, but certain states may impose inheritance taxes on the beneficiaries.

How Is Estate Tax Calculated?

The U.S. estate tax is progressive, with rates ranging from 18% to 40%. As of 2025, the federal estate tax exemption is $13.99 million for individuals and $27.98 million for married couples. Estates exceeding these exemption amounts are subject to taxation at varying rates depending on their value.

Unlike some countries where heirs are responsible for paying the estate tax, in the U.S., the estate itself is taxed before assets are distributed to beneficiaries. The tax is paid by the estate, not by the heirs.

Some jurisdictions may consider the number of heirs when calculating estate tax, which could reduce the tax burden for each person. Given the complexities of U.S. estate tax laws, consulting a tax expert is highly recommended to ensure compliance and identify potential tax-saving strategies.

Reporting Requirements for Estate Tax

Receiving an inheritance does not require annual tax payments. However, if the total value of the deceased’s estate exceeds the federal estate tax exemption of $13.99 million (as of 2025), an estate tax return (Form 706) must be filed. U.S. citizens and residents are required to report all their global assets for tax purposes.

For non-U.S. citizens, such as Israeli citizens, the estate tax exemption is much lower. The exemption for non-U.S. citizens is only $60,000, and the tax applies to U.S.-based assets, such as real estate or securities. Non-U.S. citizens may have additional reporting requirements, so it is important to understand these rules to avoid penalties.

Are There Exceptions to Estate Tax?

There are several exceptions that can reduce or eliminate estate tax liability:

• Spousal Transfers: When an estate is transferred to a surviving spouse who is a U.S. citizen, the estate tax exemption increases to $22.4 million.
• Recognized Expenses: Certain expenses, such as funeral costs and outstanding debts, can be deducted from the estate’s taxable value.
• Pre-Death Gifts: Gifts made before death are subject to U.S. gift tax, but they do not automatically exempt heirs from estate tax.

It’s also important to note that exemption thresholds are subject to change annually. Therefore, staying informed about current laws is essential for minimizing potential tax liabilities.

Special Considerations for Israeli Citizens

U.S. estate tax laws differ for U.S. citizens and Israeli citizens. Israeli citizens who inherit U.S.-based assets (such as real estate or securities) are subject to estate tax on those assets. U.S. citizens must report all their assets, including those held overseas, while Israeli citizens are only required to report U.S.-based assets.

It is also worth noting that the U.S.-Israel estate tax treaty may provide specific exemptions or benefits depending on the estate structure. Due to the complexity of these rules, Israeli citizens are strongly encouraged to consult a tax professional before making investments in U.S. assets to ensure compliance and explore tax-saving strategies.

Strategic Tax Planning for Israeli Investors

Israeli citizens looking to minimize U.S. estate tax liabilities should consider the following strategic planning options:

• Investing Through an Entity: Holding U.S. investments through an Israeli trust or entity may help reduce exposure to estate tax. However, this strategy requires careful legal and financial planning, as it involves complexities and potential reporting obligations.
• Purchasing Life Insurance: Life insurance policies can be structured to cover potential estate tax liabilities, but it’s essential to evaluate the costs and benefits with the help of a qualified tax professional.

Given the complexity of U.S. estate tax laws and the frequent changes in tax regulations, strategic planning is crucial to protect your assets from unnecessary taxation.

The Debate Over U.S. Estate Tax

Estate tax remains a controversial issue in the U.S. Critics argue that:

• The tax disproportionately affects the wealthy, constituting a financial burden on high-net-worth individuals.
• Estate tax constitutes “double taxation,” since the deceased’s assets were already subject to taxes during their lifetime.

On the other hand, supporters of estate tax argue that:

• The tax helps reduce wealth inequality by redistributing assets, promoting economic fairness.
• Estate tax only affects the heirs, not the deceased, meaning it does not constitute double taxation.

As U.S. tax laws continue to evolve, estate tax rates and exemptions may change. Keeping up with these changes is essential to ensuring compliance and minimizing tax exposure.

Conclusion

Estate tax in the United States is levied on estates exceeding a certain value threshold, with a progressive tax structure. The tax applies to U.S.-based assets, even for non-U.S. citizens, though exemption amounts and reporting requirements vary depending on citizenship. Given the complexities of U.S. estate tax laws, it is strongly recommended to consult a qualified tax professional to navigate the rules, minimize tax liabilities, and plan strategically.