Estate Tax

Taxation is complex. We provide below what we believe are the key highlights for this tax type in a 2-3 minute read for reference purposes. It is not tax advice and does not discuss the vast majority of the finer points.

What Is Estate Tax? When/How Does it Apply?

Estate tax is a levy on the assets of a deceased person’s estate, above a specified dollar threshold, before the assets are transferred to beneficiaries. If applicable, the tax is charged on the fair market value of the estate’s assets at the time of death. Nearly all financial assets are subject to the estate tax calculation (e.g. cash, real estate, retirement funds, stock-based compensation).

Transfers to a spouse upon death are usually exempt from estate tax due to the unlimited marital deduction.

What Are the Current Tax Rates/Brackets

As of 2023, individual estates worth $12.92 million or less owe no tax due to the estate tax exemption (i.e. $25.84 million for a married couple). For individuals with assets above the exemption, tax rates range from 18% to 40% in graduated brackets.

18%	$0 to $10,000
20%	$10,001 to $20,000
22%	$20,001 to $40,000
24%	$40,001 to $60,000
26%	$60,001 to $80,000
28%	$80,001 to $100,000
30%	$100,001 to $150,000
32%	$150,001 to $250,000
34%	$250,001 to $500,000
37%	$500,001 to $750,000
39%	$750,001 to $1,000,000
40%	$1,000,001 and up

Some States Also Have an Estate or Inheritance Tax

In addition to the federal estate tax detailed above, some states also levy a tax on inherited assets. For more information on which states assess these taxes, we recommend consulting The Tax Foundations' article on state inheritance tax

The estate tax exemption is scheduled to be reduced by 50% in 2026. As of 2023, the current $12.92 million estate tax exemption is scheduled to be cut in half in 2026 (adjusted for inflation). Congress could vote to change this, but that is the current plan. Financial planning around this change is important for those with significant assets.

What Types of Stock Compensation Does This Apply To?

Stock Comp Type	Estate Tax Applicability
ISOs	Yes. The difference between the strike price and FMV of the underlying stock at death is included in the taxable estate. For more info see: ISO Stock Options
NSOs	Yes. The difference between the strike price and FMV of the underlying stock at death is included in the taxable estate. For more info see: NSO Stock Options
RSUs	Yes. The full FMV of vested RSUs at death is typically included in the taxable estate. For more info see: Restricted Stock Units (RSU)
ESPPS	Depends. The ESPP plan type, if/when shares were sold, and discount/lookback benefits can all impact how this is treated for estate tax purposes. For more info see: Employee Stock Purchase Plan (ESPP)
RSAs	Yes. The FMV of RSAs at death is included in the taxable estate. For more info see: Restricted Stock Award (RSA)
SARs	Uncertain. We recommend consulting a licensed tax advisor for more details. For more info see: Stock Appreciation Right (SAR)
Phantom Stock	Uncertain. We recommend consulting a licensed tax advisor for more details. For more info see: Phantom Stock

Unique Items and Special Situations

How Vested (But Not Exercised) and Death-Accelerated Stock Comp Is Taxed

When an employee owns vested stock options or restricted stock units at the time of their death, the value of those holdings should become part of their taxable estate (and thus the estate should be responsible for paying any applicable estate taxes on the holdings). The value of vested but unexercised stock options typically has the bargain element included in the estates value.

Some companies provide “death benefit provisions” in their equity plans that allow for the acceleration of unvested stock options, RSUs, or other stock-based compensation at death. If accelerated, the taxation treatment of the income due to acceleration and the value of the stock compensation for the estate can be complex (and outside the scope of this article).

Stock option example: If an employee had 1,000 vested NSO options with a $10 strike price and the stock’s FMV was $30 at death, $20 per option would be included in the taxable estate ($20,000: 1,000 * $20).

Planning Can Frequently Reduce/Eliminate Estate Tax

With careful planning, it’s frequently possible to reduce or even eliminate federal and state estate tax liability for individuals with substantial assets. Common strategies include: (1) Gifting during life; (2) Use of trusts; (3) Family limited partnerships; and (4) Taking advantage of credits and deductions.

Stock Comp Estate Planning May Require Coordination With the Company

For stock compensation, close coordination with the company and its counsel is usually required to ensure that any estate planning strategies do not conflict with the terms of the equity plans or programs.