A practical state-by-state guide to inheritance and estate taxes, detailing the 6 inheritance tax states, exemption thresholds, beneficiary relationship classes, and tax reduction strategies.
When an individual passes away and transfers wealth to heirs, state and federal tax liabilities can significantly reduce the net assets received by beneficiaries. In estate planning, confusion frequently arises regarding the distinction between an Estate Tax and an Inheritance Tax. While both represent death taxes, they are levied against fundamentally different parties and calculated using different legal metrics. While the Federal government levies exclusively an estate tax, state tax codes vary dramatically across the United States. Evaluating the distinction between estate and inheritance taxes, analyzing state-by-state exemption rules, and detailing tax reduction strategies empowers heirs to preserve wealth.
Distinction Between Estate Tax and Inheritance Tax
Wealth transfer taxes operate through two distinct tax mechanisms:
- State / Federal Estate Tax: Levied directly against the decedent's estate as a whole before any assets are distributed to heirs. The tax is calculated on the total gross taxable value of all estate assets (real estate, brokerage accounts, business equity, life insurance), minus allowable deductions. The financial liability rests on the estate executor.
- State Inheritance Tax: Levied directly against the individual beneficiary (heir) receiving the bequest. The tax is calculated Based on two key variables: the value of the specific bequest received by that heir, and the familial relationship between the heir and the decedent. The financial liability rests on the recipient heir.
Federal law enforces an estate tax (with a 2024 exemption threshold of $13.61 million per individual, rising to $13.99 million in 2025, with a top tax rate of 40%), but enforces no federal inheritance tax.
The 6 States That Levy an Inheritance Tax
As of 2024/2025, only six states impose a state-level inheritance tax. The tax liability depends on the heir's classification group:
- Pennsylvania: Imposes an inheritance tax with zero exemption for non-spousal heirs. The tax rate is 4.5% for direct lineal descendants (children, grandchildren), 12% for collateral heirs (siblings), and 15% for non-relatives and remote heirs. Transfers to a surviving spouse or a child under 21 are taxed at 0%.
- New Jersey: Class A beneficiaries (surviving spouse, civil union partner, parents, grandparents, children, grandchildren) are completely exempt (0%). Class C beneficiaries (siblings, sons-in-law, daughters-in-law) are taxed at 11% to 16% on amounts exceeding $25,000. Class D beneficiaries (unrelated individuals) are taxed at 15% to 16% on amounts over $500.
- Maryland: Maryland is the only state in the country that levies both an estate tax (top rate 16% above a $5.0 million exemption) and an inheritance tax. Maryland's inheritance tax rate is a flat 10% on bequests to collateral heirs (nieces, nephews, friends). Lineal relatives (spouses, children, parents, siblings) are exempt (0%).
- Kentucky: Class A beneficiaries (spouses, children, parents, siblings) receive a 100% exemption (0%). Class B beneficiaries (nieces, nephews, aunts, uncles) face tiered rates from 4% to 16% with a $1,000 exemption. Class C beneficiaries (non-relatives) are taxed at 6% to 16% with a $500 exemption.
- Nebraska: Immediate relatives (parents, children, siblings) pay a 1% tax on bequests exceeding $100,000. Remote relatives (nieces, nephews, aunts, uncles) pay 11% on amounts exceeding $40,000. Non-relatives pay 15% on amounts over $25,000.
- Iowa: Iowa completed a multi-year phaseout of its inheritance tax. Rates were reduced by 20% annually starting in 2021, Reaching 0% for deaths occurring on or after January 1, 2025.
State-Level Estate Tax Jurisdictions
In addition to inheritance taxes, 12 states plus the District of Columbia enforce a state estate tax with lower exemption thresholds than the federal level:
- Oregon: Exemption threshold of $1.0 million, with marginal tax rates ranging from 10% to 16%.
- Massachusetts: Exemption threshold of $2.0 million, with marginal rates from 0.8% to 16%.
- Washington: Exemption threshold of $2.193 million, with rates from 10% to 20%.
- New York: Exemption threshold of $6.94 million. New York features an "estate tax cliff": if an estate value exceeds 105% of the exemption threshold, the entire estate loses the exemption and is taxed from dollar one.
- Connecticut: Exemption matches the federal threshold ($13.61 million in 2024), with a flat 12% top rate.
Wealth Preservation and Tax Structuring Strategies
To mitigate state inheritance and estate tax liabilities, estate planners utilize specific legal structures:
- Annual Exclusion Gifting: Individuals can gift up to $18,000 per year per recipient in 2024 ($19,000 in 2025, or $38,000 for married couples splitting gifts) without triggering federal gift tax or using lifetime exemption capacity.
- Irrevocable Trusts:
- Grantor Retained Annuity Trusts (GRATs): Transfer rapidly appreciating assets out of the taxable estate while retaining annuity payments, transferring growth tax-free to beneficiaries.
- Irrevocable Life Insurance Trusts (ILITs): Exclude life insurance death benefits from gross estate calculations, providing liquidity to pay state inheritance taxes without liquidating real estate or closely-held businesses.
- Domicile Planning: High-net-worth individuals establish primary legal domicile in zero-death-tax states (Florida, Texas, Nevada, Wyoming). Legal compliance requires fulfilling the 183-day physical presence rule, updating voter registration, re-titling primary real estate, and shifting banking relationships.