Death and taxes — the two great certainties of life. What many people don’t realize is that, in some cases, those two certainties arrive at the same time. When someone passes away and leaves assets behind, the government may want a share before those assets reach the people who inherit them. Understanding how inheritance and estate taxes work can save your family from unnecessary confusion, and sometimes, a significant financial hit.
Estate Tax vs. Inheritance Tax: They’re Not the Same Thing
This is where most people get tangled up. Estate tax and inheritance tax are related but distinct concepts, and mixing them up can lead to some real surprises.
An estate tax is levied on the total value of a deceased person’s estate before anything is distributed to heirs. Think of it as a tax on the act of transferring wealth. In the United States, the federal government imposes an estate tax, but only on estates exceeding a certain threshold — $13.61 million per individual as of 2024. Amounts below that limit pass on completely tax-free at the federal level.
An inheritance tax, on the other hand, is paid by the person who receives the assets, not the estate itself. It depends on who you are in relation to the deceased. Most states that impose inheritance taxes exempt surviving spouses entirely, and many also exempt children. More distant relatives — cousins, friends, or non-relatives — tend to face higher rates.
Which States Have These Taxes?
Only a handful of U.S. states currently impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state that has both an estate tax and an inheritance tax, which means residents there can potentially face both.
If you live in a state with no inheritance tax and your estate falls below the federal threshold, your heirs may owe nothing at all — a fact that surprises many families who assumed the process would be more complicated.
How the Numbers Actually Work
Say a parent passes away in Pennsylvania and leaves $200,000 to an adult child. Pennsylvania’s inheritance tax rate for direct descendants is 4.5%, which means the child would owe $9,000 before receiving the remainder. The same amount left to a sibling would be taxed at 12%, and to a friend, at 15%.
Estates subject to federal estate tax are taxed on the amount above the exemption threshold, not the full value. So if an estate is worth $15 million, only about $1.39 million would be subject to federal tax, at rates that can reach up to 40%.
Smart Planning Can Make a Real Difference
There are legitimate, widely used strategies to reduce or avoid these taxes altogether. Gifting assets during your lifetime is one of the most common approaches. The IRS allows individuals to give up to $18,000 per person per year (as of 2024) without triggering any gift tax. Over time, those transfers can meaningfully reduce the size of a taxable estate.
Trusts and Other Tools
Irrevocable trusts are another powerful option. When assets are placed into an irrevocable trust, they’re no longer considered part of the taxable estate. This can be especially useful for high-value assets like real estate or business interests. Charitable donations, life insurance structured correctly, and family limited partnerships are also tools that estate planning attorneys commonly use.
The key takeaway is that none of this has to be complicated if you plan ahead. Waiting until a crisis forces the conversation almost always leads to worse outcomes. A straightforward conversation with an estate planning attorney — ideally while everyone involved is healthy and clear-headed — can protect your family from both financial loss and unnecessary stress down the road.
