Guide to Inheritance Taxes: Who Pays, How Much

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Understanding taxes related to death and inheritance can feel overwhelming, but knowing the basics is crucial for effective financial planning. This guide breaks down the different types of taxes involved—federal estate tax, state estate taxes, and state inheritance taxes—explaining who pays them, current regulations for 2025, and common strategies for managing these financial obligations.

Defining “Death Taxes”: Estate vs. Inheritance

When discussing taxes related to assets transferred after someone passes away, two primary types come into play in the United States: estate taxes and inheritance taxes. Though often confused, they differ significantly in who bears the responsibility for payment.

Estate Tax

This tax is levied on the total net value of a deceased person’s assets (their “estate”) before any assets are distributed to heirs or beneficiaries. The responsibility for paying the estate tax falls on the estate itself, typically handled by the executor or administrator. Think of it as a tax on the right to transfer property at death. Estate taxes can be imposed at both the federal and state levels.

Inheritance Tax

This tax is imposed on the assets received by a beneficiary or heir from an estate. Unlike the estate tax, the responsibility for paying the inheritance tax falls on the individual beneficiary who inherits the property. Inheritance taxes are only levied by a small number of state governments; there is no federal inheritance tax. The amount of inheritance tax often depends on the value of the inheritance received and the beneficiary’s relationship to the deceased person.

The Federal Estate Tax: Rules for 2025

The federal government imposes an estate tax, but due to a high exemption amount, the vast majority of estates in the U.S. do not owe this tax.

2025 Federal Exemption Amount

The key figure determining federal estate tax liability is the Basic Exclusion Amount (BEA). This is the amount of an estate’s value that is exempt from the tax. For estates of individuals dying in 2025, the federal BEA is $13,990,000. This amount is adjusted annually for inflation.

An estate tax return (IRS Form 706) generally only needs to be filed if the decedent’s gross estate, plus certain lifetime taxable gifts made after 1976, exceeds this $13.99 million threshold for 2025. Consequently, only the wealthiest estates are potentially subject to federal estate tax.

Federal Estate Tax Rates

For the portion of an estate’s value that exceeds the $13.99 million exemption in 2025, a progressive federal estate tax rate applies. The rates start at 18% on the first taxable amounts and climb to a maximum rate of 40% for taxable amounts exceeding $1 million over the exemption.

The following table illustrates the federal estate tax rates applicable to the amount exceeding the $13.99M exemption for 2025:

Federal Estate Tax Rates (on amount exceeding $13.99M Exemption in 2025)

For example, if an estate is valued at $14.99 million in 2025, the taxable amount is $1 million ($14.99M – $13.99M). According to the table, the tax would be $345,800.

Portability: Sharing Exemptions Between Spouses

A significant feature of the federal estate tax system is “portability.” Portability allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. This unused amount is formally known as the Deceased Spousal Unused Exclusion (DSUE) amount.

In practical terms, portability enables a married couple to potentially shield up to double the individual exemption amount from federal estate tax. For 2025, this means a couple could potentially transfer up to $27.98 million ($13.99 million x 2) tax-free.

However, portability is not automatic. To secure the DSUE amount for the surviving spouse, the executor of the first deceased spouse’s estate must file a federal estate tax return (Form 706) and make the portability election on that return. This return must be filed timely – generally within 9 months of death, or 15 months if a 6-month filing extension is obtained. This filing requirement exists even if the first spouse’s estate is below the filing threshold and owes no federal estate tax.

Recognizing that some estates not otherwise required to file might miss this deadline, the IRS introduced a simplified procedure (Revenue Procedure 2022-32). This allows estates below the filing threshold to file Form 706 and elect portability up to five years after the decedent’s date of death, provided they follow specific instructions. This extended deadline is crucial because failing to make a timely portability election can result in the loss of potentially millions in exemption for the surviving spouse.

It’s important to note a few limitations: a surviving spouse can only use the DSUE amount from their last deceased spouse, and the exemption from the Generation-Skipping Transfer (GST) tax is not portable between spouses.

Important Note: The 2026 “Sunset”

The current high federal estate tax exemption ($13.99 million in 2025) is a temporary provision enacted under the Tax Cuts and Jobs Act (TCJA) of 2017. This provision is scheduled to expire, or “sunset,” at the end of 2025.

Unless Congress takes legislative action to extend the current levels, the federal BEA will revert to its pre-TCJA amount, adjusted for inflation, starting January 1, 2026. This is projected to be around $7 million per individual.

This looming reduction creates a significant planning consideration. Individuals whose estates might fall below the current $13.99 million threshold but could exceed the projected $7 million threshold face a strategic window. Making substantial lifetime gifts before the end of 2025 could allow them to utilize the higher exemption amount to transfer wealth tax-free. The IRS has issued regulations confirming that taxpayers taking advantage of the higher exclusion amount for gifts made between 2018 and 2025 will not be penalized if the exclusion amount decreases later.

This scheduled “sunset” makes proactive estate planning particularly important in the near term, especially for those whose net worth is between the projected 2026 level and the current 2025 exemption.

State Inheritance Taxes: A Closer Look

While there is no federal inheritance tax, a handful of states impose their own tax on inheritances received by beneficiaries.

Which States Impose Inheritance Tax?

As of 2025, the following five states levy an inheritance tax:

• Kentucky
• Maryland (Maryland uniquely imposes both an inheritance tax and a state estate tax)
• Nebraska
• New Jersey
• Pennsylvania

It is important to note that Iowa previously had an inheritance tax, but it was fully repealed for individuals dying on or after January 1, 2025.

How State Inheritance Taxes Work

The core feature distinguishing inheritance tax from estate tax is that the beneficiary pays the tax based on what they receive. The tax calculation and liability are specific to each heir.

State inheritance tax laws typically categorize beneficiaries based on their relationship to the deceased person. This relationship dictates both the exemption amount (the value of inherited property not subject to tax) and the tax rate applied to the taxable portion.

Generally, the closer the familial relationship, the more favorable the tax treatment:

• Surviving spouses are almost always completely exempt from inheritance tax.
• Direct lineal descendants (children, grandchildren) and often lineal ascendants (parents, grandparents) usually receive significant exemptions and face zero or very low tax rates.
• More distant relatives (like siblings, nieces, nephews, aunts, uncles) and unrelated individuals (like friends) typically face lower exemptions and significantly higher tax rates.

The tax is generally governed by the laws of the state where the deceased person lived at the time of death, or where tangible property (like real estate) owned by the deceased is located. The beneficiary’s state of residence usually does not determine the inheritance tax liability.

State-by-State Inheritance Tax Details (2025)

The rules vary significantly by state. Below is a summary table:

Summary of State Inheritance Taxes (as of early 2025)

Table summarizes general rules; exemptions/rates are complex and subject to change. Always consult official state resources.

State Estate Taxes: An Overview

In addition to the federal estate tax, 12 states and the District of Columbia impose their own separate estate tax. Like the federal version, these taxes are paid by the estate based on the net value of assets before distribution.

Which Jurisdictions Impose a State Estate Tax?

The jurisdictions with a state-level estate tax in 2025 are:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland (Also has inheritance tax)
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

How State Estate Taxes Differ from Federal

While conceptually similar to the federal tax, state estate taxes have crucial differences:

Lower Exemption Amounts

This is the most significant difference. State estate tax exemptions are typically much lower than the federal $13.99 million. For 2025 (or latest available), exemptions range from $1 million in Oregon to $7.16 million in New York, with many states falling between $2 million and $5 million. Connecticut currently aligns with the federal exemption.

Because these thresholds are considerably lower, many more estates are potentially subject to state estate tax than federal estate tax. This makes understanding state rules critical for residents of these jurisdictions, even those with moderate wealth.

Varying Tax Rates

State tax rates also differ from the federal structure and from each other. Top marginal rates often reach 16%, although some states like Hawaii and Washington go up to 20%, while Connecticut and Maine top out at 12%.

Lack of Portability (Usually)

Unlike the federal system, most states with an estate tax do not allow portability of unused exemptions between spouses. Notable exceptions currently include Maryland, Hawaii, and potentially Connecticut due to its alignment with the federal exemption.

The general lack of state-level portability means married couples in these states often need to use more traditional estate planning techniques, such as bypass trusts (discussed later), to ensure both spouses’ state exemptions are utilized effectively. Relying solely on the unlimited marital deduction (leaving everything to the surviving spouse) could result in wasting the first spouse’s state exemption, leading to higher state estate taxes upon the second spouse’s death.

Other State-Specific Rules

Some states have unique provisions, such as New York’s “cliff tax,” where estates exceeding the exemption by a certain percentage lose the exemption entirely and are taxed from the first dollar. Some states include certain lifetime gifts made within a specific period before death in the estate calculation. Some states allow or require separate state-level Qualified Terminable Interest Property (QTIP) elections.

State-by-State Estate Tax Details (2025)

The following table summarizes key details for jurisdictions with state estate taxes:

Summary of State Estate Taxes (as of early 2025)

Exemption amounts are per individual and based on the latest available information for 2025 or the most recent year cited in sources. Rates are often progressive; ranges are approximate. Always verify with the official state source.

What Assets Are Part of a Taxable Estate?

To calculate potential estate tax, one must first determine the “Gross Estate.” This is the starting point and encompasses the value of nearly all property the decedent owned or had certain interests in at the time of death.

Common Types of Included Assets

The gross estate typically includes a wide range of assets:

• Real Estate: Homes, vacation properties, rental properties, land.
• Financial Accounts: Cash, checking and savings accounts, certificates of deposit (CDs), money market accounts, brokerage accounts, stocks, bonds (corporate, municipal, foreign).
• Retirement Accounts: The value of accounts like 401(k)s, IRAs, and other retirement plans at the date of death.
• Life Insurance: Proceeds from policies on the decedent’s life if the decedent owned the policy or retained incidents of ownership.
• Business Interests: Value of ownership in sole proprietorships, partnerships, LLCs, or closely held corporations. Farm assets are also included.
• Personal Property: Cars, boats, furniture, jewelry, artwork, antiques, collectibles.
• Assets in Revocable Trusts: Property held in a trust that the decedent could revoke or amend during their lifetime is included.
• Certain Annuities: The value of payments due to a beneficiary surviving the decedent.
• Other Assets: Intangible property like patents, copyrights, royalties, and certain interests in property transferred during life where the decedent retained control or benefits (e.g., retained life estate).
• Certain Lifetime Gifts: Gifts made within three years of death may sometimes be “clawed back” into the estate for tax calculation purposes, particularly transfers of life insurance policies or gifts where certain rights were retained. Some states have specific rules about including recent gifts.

It is a common misunderstanding that only assets passing through probate (the court process for validating a will and distributing assets) are counted for estate tax purposes. The “gross estate” is significantly broader. It includes many assets that avoid probate, such as property held in a revocable living trust, assets owned jointly with right of survivorship (the decedent’s portion), and life insurance proceeds paid directly to a beneficiary if the decedent owned the policy. Therefore, using tools like living trusts to avoid probate does not automatically eliminate potential estate tax liability.

Basic Principles of Asset Valuation

Assets included in the gross estate are generally valued at their Fair Market Value (FMV) as of the decedent’s date of death. The FMV is essentially the price the asset would sell for on the open market between a knowledgeable, willing buyer and a knowledgeable, willing seller, with neither under pressure to act.

This means the value used for tax purposes is the current market value, not what the decedent originally paid for the asset. Any appreciation in value over the decedent’s lifetime is captured in the estate valuation.

Valuation methods vary by asset type:

• Cash and bank accounts are valued at their face value.
• Publicly traded stocks and bonds are typically valued based on the average of the high and low trading prices on the date of death.
• Real estate, closely held businesses, and unique items like art or collectibles usually require a formal appraisal by a qualified professional to determine FMV.

In some circumstances, the executor may elect an Alternate Valuation Date, which is six months after the date of death. This election is only permissible if it results in a decrease in both the value of the gross estate and the amount of estate tax due.

Once the gross estate is valued, certain deductions are subtracted to arrive at the “Taxable Estate.” Common deductions include mortgages and debts owed by the decedent, funeral expenses, estate administration costs (like attorney and appraisal fees), property passing to a surviving U.S. citizen spouse (under the unlimited marital deduction), and bequests to qualified charities.

Common Strategies to Manage Estate and Inheritance Taxes

While taxes on significant estates can be substantial, several legitimate strategies and financial planning tools can help manage or potentially reduce these obligations. These approaches generally aim to reduce the size of the taxable estate or utilize available exemptions and deductions effectively. Implementing these strategies often involves complex legal and tax considerations, making professional advice essential.

Making Annual Tax-Free Gifts

One straightforward strategy is to make lifetime gifts using the annual gift tax exclusion. Federal law allows individuals to give away a certain amount of money or assets each year to any number of recipients without incurring gift tax or using up their lifetime gift and estate tax exemption.

For 2025, the annual gift tax exclusion amount is $19,000 per recipient. This means an individual could give $19,000 to each of their children, grandchildren, or any other person in 2025 without tax implications.

Married couples can combine their exclusions through “gift splitting,” allowing them to give up to $38,000 per recipient in 2025. Importantly, electing gift splitting requires filing a federal gift tax return (Form 709), even if no tax is due, to signify the consent of both spouses.

Making consistent use of the annual exclusion over many years can significantly reduce the value of an individual’s taxable estate, passing wealth to the next generation tax-efficiently. Payments made directly to educational institutions for tuition or to medical providers for healthcare expenses on behalf of someone else are generally not considered taxable gifts and do not count against the annual exclusion limit.

Utilizing the Lifetime Gift Tax Exemption

Beyond the annual exclusion, individuals have a substantial lifetime exemption that applies to both gift and estate taxes (currently $13.99 million for 2025). Gifts made during life that exceed the annual exclusion amount reduce this lifetime exemption.

Making large lifetime gifts, up to the available lifetime exemption amount, can be a powerful strategy. It removes the gifted assets from the donor’s estate, meaning those assets—and any future appreciation or income they generate—will not be subject to estate tax upon the donor’s death. Given the potential halving of the federal exemption in 2026, individuals with estates large enough to be affected may consider utilizing the current high exemption through significant gifting before the end of 2025.

The Unlimited Marital Deduction

For married couples where both spouses are U.S. citizens, federal tax law provides an unlimited marital deduction. This allows spouses to transfer unlimited amounts of assets to each other, either during life or at death, without incurring federal gift or estate tax.

This deduction effectively defers estate tax rather than eliminating it. The assets transferred to the surviving spouse will be included in their estate upon their subsequent death and potentially taxed at that time. Special rules apply to transfers involving non-U.S. citizen spouses (often requiring a Qualified Domestic Trust or QDOT) and certain types of property interests known as “terminable interests”.

Making Charitable Donations

Charitable giving can also play a role in estate tax planning. Bequests made to qualified charitable organizations at death are generally fully deductible from the gross estate for federal estate tax purposes. This deduction reduces the value of the taxable estate dollar-for-dollar.

Lifetime gifts to charity can also reduce the future taxable estate and may provide current income tax deductions. More complex strategies, such as Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs), allow individuals to structure gifts that benefit both charity and non-charitable beneficiaries (like family members) while potentially achieving tax advantages.

Using Trusts

Trusts are versatile legal tools frequently used in estate planning to manage assets, control distributions, and achieve tax objectives. Two types often employed in estate tax planning are:

Irrevocable Life Insurance Trust (ILIT)

An ILIT is specifically designed to own a life insurance policy. The person creating the trust (the grantor) makes gifts to the trust, and the trustee uses those funds to pay the policy premiums. Because the trust, not the grantor, owns the policy, the death benefit proceeds are paid to the trust upon the grantor’s death and are generally excluded from the grantor’s taxable estate.

These tax-free proceeds can then provide liquidity to the beneficiaries or the estate (e.g., to pay estate taxes or other debts) without increasing the estate tax liability. Setting up and funding an ILIT involves specific rules, including the trust being irrevocable (meaning the grantor generally cannot change it) and managing potential gift tax implications on premium payments (often addressed using “Crummey” withdrawal rights for beneficiaries to qualify contributions for the annual exclusion).

Bypass Trust (Credit Shelter Trust or B Trust)

This type of irrevocable trust is commonly used by married couples, particularly when aiming to utilize both spouses’ estate tax exemptions (especially relevant in states without portability) or for generation-skipping planning. When the first spouse dies, assets up to their available exemption amount are transferred into the Bypass Trust.

The surviving spouse can typically receive income from the trust and may have limited access to the principal (e.g., for health, education, maintenance, support). However, because the surviving spouse doesn’t own the trust assets, the assets (including any appreciation) are not included in the survivor’s estate upon their death. This “bypasses” the survivor’s estate for tax purposes, preserving the first spouse’s exemption and potentially reducing overall estate taxes for the couple.

Bypass trusts are also useful for protecting assets for children from a previous marriage or preserving the Generation-Skipping Transfer (GST) tax exemption, which is not portable.

These strategies often interact and involve intricate rules. For instance, funding a Bypass Trust requires careful asset titling, while ILITs need precise Crummey notice procedures. State laws add another layer of complexity. Consequently, effective estate tax planning typically requires a coordinated approach involving experienced legal, tax, and financial advisors to tailor strategies to individual circumstances and ensure compliance.

Filing Tax Returns and Paying the Tax

Administering an estate involves specific tax filing responsibilities handled by the estate’s representative.

Responsibility for Filing and Payment

The executor (if named in a will) or the administrator (if appointed by a court when there is no will), also referred to as the personal representative, is legally responsible for managing the estate. This includes filing all required federal and state estate tax returns and paying any taxes owed using the estate’s assets before distributing the remainder to beneficiaries.

Federal Estate Tax Return (IRS Form 706)

• The Form: The primary federal return is IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
• Who Must File: Filing is required if the decedent’s gross estate plus adjusted taxable lifetime gifts exceeds the Basic Exclusion Amount ($13.99 million for deaths in 2025). Filing is also required, regardless of estate size, if the estate intends to elect portability of the DSUE amount to the surviving spouse.
• Deadline to File: Form 706 is due nine months after the decedent’s date of death.
• Extension to File: An automatic six-month extension of the filing deadline can be requested by filing Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, before the original nine-month due date. This pushes the filing deadline to 15 months after death.
• Deadline to Pay: Crucially, any federal estate tax owed is due nine months after the date of death, even if a filing extension is granted. Late payments accrue interest and potential penalties.
• Portability Election Deadline: The portability election must be made on a timely filed Form 706 (within the 9-month or 15-month deadline). Missing this deadline generally means forfeiting the DSUE amount for the surviving spouse.
• Special Portability Filing Extension (Rev. Proc. 2022-32): A special rule exists for estates that are not required to file based on value (i.e., below the $13.99M threshold for 2025) but missed the deadline to elect portability. These estates can file Form 706 to make the election up to five years after the date of death by following specific procedures outlined in Rev. Proc. 2022-32. This five-year window provides significant relief but only applies in these specific circumstances.
• Where to File: Form 706 is generally mailed to the IRS Center in Kansas City, MO. Electronic payment options are available via the Electronic Federal Tax Payment System (EFTPS).
• Other Federal Forms: Estates of nonresidents who were not U.S. citizens use Form 706-NA. Lifetime gifts exceeding the annual exclusion are reported on Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, which is typically due April 15 of the year after the gift is made.

State Tax Returns

If the decedent lived in or owned property in a state with its own estate or inheritance tax, separate state tax returns must also be filed.

• Check State Requirements: The executor must determine the filing requirements and forms for each applicable state.
• State-Specific Forms: Each state has its own forms (e.g., Pennsylvania uses REV-1500 for inheritance tax; Oregon uses OR-706 for estate tax; Rhode Island uses RI-706).
• Varying Deadlines: State filing and payment deadlines differ. For example, Connecticut’s estate tax return is due 6 months after death, while Pennsylvania’s inheritance tax return is due 9 months after death, Oregon’s estate tax return is due 12 months after death (for deaths after 1/1/22), and Kentucky’s inheritance tax return is due 18 months after death if tax is owed. Always verify the specific state deadline.
• Filing Location: State returns are filed with the respective state’s department of revenue or equivalent agency (sometimes through a county office, like the Register of Wills in Pennsylvania).

Additional Resources

For more detailed information about estate and inheritance taxes, consider these resources:

• IRS Estate and Gift Taxes
• IRS Form 706 Instructions
• Federation of Tax Administrators – State Tax Agencies
• American College of Trust and Estate Counsel
• National Association of Estate Planners & Councils

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