Planning for what happens after you are gone is never an easy topic, but it’s an important one. Whether you’re trying to protect your loved ones from financial stress or simply want to understand the tax laws that could impact your estate, our guide is here to help. Below, we answer some of the most common questions about estate taxes, inheritance taxes, and how you can minimize the tax burden on your heirs.
At a glance:
- Estate taxes are paid by the estate itself, with exemptions varying at the federal and state levels.
- Inheritance taxes are paid by the beneficiaries and depend on state laws and relationships to the decedent.
- Only Maryland imposes both estate and inheritance taxes.
- Proper estate planning can help minimize or avoid these taxes.
Estate and inheritance tax FAQs
1. Are estate and inheritance taxes the same?
No, they’re not. While both are often lumped under the term “death taxes,” the key differences lie in who pays the tax and how it’s calculated, which we’ll discuss in detail below.
2. What are estate taxes?
Estate taxes are often called death taxes because they’re levied on the net value of a deceased person’s estate before the assets are distributed to the family members or other beneficiaries. Essentially, this tax applies to the estate’s value as a whole — not to the individual inheritances received by beneficiaries.
What’s included in an estate?
A taxable estate includes all the assets the person owned or had an interest in at the time of death. Here’s what that might cover:
- Real estate
- Life insurance proceeds (if the deceased owned the policy)
- Investments, including stocks, bonds, and annuities
- Bank accounts
- Personal property like cars, jewelry, or art collections
Federal vs. state estate taxes
- Federal estate tax: The federal government imposes an estate tax, but most estates don’t pay it because of the high estate tax exemption ($13.61 million in 2024, increasing to $13.99 million in 2025). The federal estate tax rate varies from 18% to 40%, depending on how much your estate’s value exceeds the exemption limit:
| Tax Rate | Taxable Amount (Value of Estate Exceeding Exemption) |
|---|---|
| 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 million |
| 40% | More than $1 million |
- State estate tax: Some state governments also impose estate taxes, often with much lower exemption thresholds than the federal level. Tax rates also vary by state — most use marginal rates, but one state (Connecticut) imposes a flat estate tax rate. Twelve states and the District of Columbia impose estate taxes as of 2024. Here are the exemptions for each:
- Connecticut – $13,610,00
- Hawaii – $5,490,000
- Illinois –$4,000,000
- Maine – $6,800,000
- Maryland – $5,000,000
- Massachusetts – $2,000,000
- Minnesota – $3,000,000
- New York – $6,940,000
- Oregon – $1,000,000
- Rhode Island – $1,774,583
- Vermont – $5,000,000
- Washington – $2,193,000
- District of Columbia – $4,715,600
Example scenarios
Let’s say Sarah passes away, leaving behind an estate worth $15 million. After applying the exemption amount of $13.61 million, her taxable estate is $1.39 million. Since her estate’s value exceeds the exemption limit by more than $1 million, it falls in the 40% federal tax bracket. At a federal estate tax rate of 40%, her estate owes $556,000 to the IRS before assets can be distributed. If Sarah lived in a state that levies estate taxes, we’d use the same formula to calculate any state estate tax owed.
Now, let’s say Sarah’s estate was only worth $2 million. In this scenario, her estate would not be taxed at the federal level because it is worth less than the exemption amount. Whether her estate owes state taxes depends on her state’s exemption amount. However, note that only Oregon and Rhode Island have exemption amounts lower than $2 million in 2024.
The Tax Foundation website has a helpful table of estate tax exemptions and estate tax rates in 2024.
3. What are inheritance taxes?
Inheritance taxes work differently from estate taxes. This tax is paid by the family members or other recipients who inherit the assets, not by the estate itself. There is no federal inheritance tax. However, a handful of states still impose inheritance taxes.
Which states impose inheritance taxes?
Only six states currently levy an inheritance tax for 2024:
- Iowa (will no longer impose inheritance taxes starting in 2025)
- Kentucky
- Maryland (the only state with both inheritance and estate taxes)
- Nebraska
- New Jersey
- Pennsylvania
Some states have inheritance tax exemptions, while others do not. Depending on the state, tax rates can vary from 0% to 16%. In Kentucky, Maryland, New Jersey, and Pennsylvania, the tax rate can depend on an heir’s proximity to the deceased person. For example, these states might offer lower tax rates or higher exemption thresholds to immediate family members who lived with (or near) the person who passed away.
Example scenario
Imagine you live in Texas and inherit $1 million from your uncle’s estate in Kentucky. Since you’re not an immediate family member, you’re subject to the state’s inheritance tax rates. If the rate is 10%, you’d owe $100,000 in taxes.
4. What are the differences between estate taxes and inheritance taxes?
Here are the main differences between inheritance taxes and estate taxes at a glance:
| Estate Tax | Inheritance Tax | |
|---|---|---|
| Who pays? | The estate pays before distributing assets to heirs. | The heirs pay after receiving their inheritance. |
| Federal vs. state level | Exists at the federal level and in some states. | Only exists at the state level. |
| Tax applies to? | The total estate’s value. | The individual inheritance received by beneficiaries. |
5. Do all states impose these taxes?
No, many states don’t impose either tax. For tax year 2024, only 12 states and the District of Columbia impose an estate tax, and only six states impose an inheritance tax.
6. Which states have both taxes?
Maryland is currently the only state with both estate and inheritance taxes. For example, if someone in Maryland dies with an $18 million estate and leaves $1 million to a distant relative, the estate may face state and federal estate taxes, while the relative could owe inheritance tax on their portion.
7. How do estate taxes work for married couples?
For married couples, the estate tax law offers significant benefits:
- Unlimited marital deduction: Any assets left to a surviving spouse are exempt from estate taxes.
- Double exemption: The federal exemption amount ($13.61 million in 2024) applies to each spouse, making the estate exemption amount for married couples $27.22 million in 2024.
- Portability: The unused portion of the first spouse’s exemption amount can be transferred to the surviving spouse, effectively doubling the exemption for the second death (see example below).
Example scenario
John passes away, leaving $10 million to his wife, Nancy. No federal estate tax applies. When his wife passes later, her estate can use both her and John’s estate tax exemptions, shielding up to $27.22 million from taxes for tax year 2024.
Note: To do this, John’s estate must file a federal estate tax return and elect to allow Nancy to use his exemption at the time of her death.
8. What’s the difference between a beneficiary and an heir, and can I be both when someone dies?
A beneficiary is a person named to receive specific assets when someone dies. An heir, on the other hand, receives assets according to state law through probate court. This process occurs when a person passes away without specifying who should inherit their assets in a will.
A beneficiary can be designated to receive particular assets upon someone’s death. For instance, if you are named as the beneficiary of a bank account, that account will become yours when the account holder dies.
It’s possible to be both a beneficiary and an heir. This scenario may occur if you are named a beneficiary of certain accounts, but the deceased person did not leave a will. In this case, you would receive the accounts you’re named for as a beneficiary, and according to state law, you would also be entitled to your portion of the estate as an heir.
9. Can I avoid these taxes altogether?
Avoiding estate and inheritance taxes altogether isn’t always possible, but proper estate planning can significantly reduce the tax burden on your heirs.
10. How can I minimize estate and inheritance taxes?
Here are some strategies to potentially lower your estate’s tax liability:
- Gift assets during your lifetime to reduce your estate’s value.
- Set up an irrevocable trust to shelter assets from taxation.
- Purchase life insurance to cover anticipated tax liabilities.
- Use charitable donations to lower the taxable estate.
- Take advantage of state-specific exemptions and credits.
The bottom line
Estate and inheritance taxes can feel complicated, but understanding how they work helps you take charge of your estate planning. Whether you’re dealing with the federal estate tax, a state inheritance tax, or both, thoughtful tax planning can protect your loved ones and reduce the overall tax burden.
