What Taxes Does an Estate Owe?

If you are beginning the process of estate planning, you may be wondering, “what taxes does an estate owe?” Critically, the tax liability of an estate can substantially reduce the inheritance each beneficiary would receive. While the amount of estate taxes — if they are owed at all — depends on the size of the estate, there are several strategies that can be used to minimize or eliminate the overall tax burden.

When Does an Estate Owe Taxes?

Estate taxes refer to the tax liability on all the assets owned by your estate at the time of your passing. While Michigan does not impose a state-level estate or inheritance tax, your estate may owe federal taxes after your death if it exceeds the exemption amount. This amount, also referred to as the “lifetime exemption,” changes each year due to tax law reforms and inflation.

In 2025, the estate tax exemption amount is $13.99 million for an individual. In 2026, this amount will increase to $15 million. If the total value of your taxable estate is less than the exemption amount, your estate would not incur any federal tax liability at the time of your death. 

What Assets are Part of Your Taxable Estate?

If you are questioning, “what taxes does an estate owe?” it’s vital to understand what assets are included in your taxable estate. A wide range of assets may be included in your taxable estate, such as: 

• Real estate, including vacation homes, rental properties, vacant land, and your primary residence
• Stocks, bonds, and mutual funds
• Cash and financial accounts, such as savings accounts, checking accounts, and certificates of deposit (CDs)
• Business interests
• A 401(k) or other types of retirement accounts
• Annuity payments and life insurance policies owned by you
• Vehicles, including cars, boats, and RVs
• Personal property such as clothing, jewelry, collectibles, and furniture 

Importantly, there are many types of assets that are excluded from a taxable estate, including those held in an irrevocable trust, gifts made during your lifetime, assets directly left to charity, and certain jointly held property.

Who Pays the Taxes Owed by an Estate?

The federal estate tax must be paid by the estate itself before heirs or beneficiaries can receive the assets to which they are entitled. The personal representative is responsible for handling this process — including filing the tax return and ensuring the taxes are paid. If your will specifies how the estate taxes should be paid, the instructions you provide would be followed. However, if you do not outline a method, the personal representative can use their judgment regarding the source from which the funds should be withdrawn.    

What Tax Liabilities Do Beneficiaries Incur?

Although the estate tax exemption amount is historically high, it’s crucial to strategically plan to help your beneficiaries avoid any potential tax liability incurred in connection with capital gains. Although your beneficiaries would not be taxed on the inherited asset, if they sell the asset for a profit, they would be responsible for paying capital gains taxes on the appreciation that occurred after your passing. 

The step-up basis rule can significantly benefit beneficiaries. Specifically, it minimizes the liability they would incur on inherited assets by allowing the cost-basis of an asset to be adjusted to the fair market value on the date of your death. This rule applies to real estate, stocks and bonds, business interests, and certain other types of assets. 

For instance, say you purchased a property for $200,000 and it is worth $500,000 at the time of your death. This would make the stepped-up basis $500,000. If the beneficiary of the asset sells it for $575,000, they would only be taxed on the $75,000 appreciation that occurred after your death — not the initial $300,000. Without the step-up in basis, the taxable gain would be $375,000 and result in greater tax liability. 

What Strategies Can You Use to Reduce Estate Taxes?

If your estate will be subjected to estate taxes, there are several strategies that can be implemented to help reduce the burden. Various types of trusts can be used to minimize liability or eliminate it altogether, such as irrevocable trusts, which can remove assets from your taxable estate. Other types of trusts that can reduce taxes for larger estates include charitable trusts, irrevocable life insurance trusts, grantor-retained annuity trusts, and qualified personal residence trusts. 

Additionally, lifetime gifting can be utilized as part of a planning strategy to minimize estate taxes. The IRS allows an individual to gift a certain amount of their assets to any number of people annually without incurring gift taxes or reducing their lifetime gift and estate tax exemption. In 2025, this amount is $19,000 per person.   

Contact an Experienced Michigan Estate Planning Attorney

Tax planning for estates can be complex and it’s essential to have a knowledgeable attorney by your side who can guide you through the process. We invite you to contact Estate Planning & Elder Law Services today to learn more about how we can assist you with implementing strategies that will reduce the tax burden on your estate. Our attorneys provide trusted representation to individuals and families for estate planning matters — and work to ensure you have the peace of mind you need.