What Inheritance Taxes Are and Who Pays Them

Inheritance tax is a tax on money or property that passes to heirs after someone dies. The person who inherits pays the tax, not the estate itself — though this varies by state. Only a handful of states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. The federal government does not tax inheritances at all, though it does tax large estates before they are distributed.

The key distinction: estate tax is paid by the estate before heirs receive anything, while inheritance tax is paid by the person who receives the money or property. Some states have both. Some have neither. Your state matters far more than federal law for most families.

The amount owed depends on the size of what you leave behind, your relationship to the heir, and your state's rules. A child inheriting from a parent in Pennsylvania might owe nothing, while a niece inheriting the same amount in the same state could owe 15 percent. Spouses are often exempt entirely.

Key Takeaways

  • Only seven states have inheritance taxes, and rates and exemptions vary widely — check your state's rules before assuming you owe anything.
  • Federal estate tax applies only to estates over $13.61 million (as of 2024), so most families do not face it, but this threshold drops in 2026 unless Congress acts.
  • The relationship between the heir and the deceased matters: spouses are usually exempt, while distant relatives and non-relatives often pay higher rates.
  • Trusts, life insurance, and gifts made during your lifetime can reduce what your heirs owe, but the rules are specific and timing matters.
  • A tax professional who knows your state's rules can identify which of your assets trigger taxes and which do not.

Which Assets Trigger Inheritance or Estate Taxes

Not everything you own is taxed the same way. Your house, bank accounts, stocks, and retirement accounts all have different rules. Life insurance proceeds, for example, are usually not subject to inheritance tax but may be subject to estate tax if the policy is owned by your estate. Retirement accounts like IRAs and 401(k)s pass directly to named beneficiaries and bypass probate, but their value still counts toward your taxable estate for federal purposes.

Assets held in a revocable living trust avoid probate but do not avoid estate tax — the IRS still counts them. Assets in an irrevocable trust may be removed from your taxable estate entirely, but you lose control of them during your lifetime. Jointly owned property with a right of survivorship passes directly to the surviving owner and is not subject to inheritance tax in most states, though it may be subject to estate tax.

Gifts you make during your lifetime to reduce your taxable estate have strict limits. You can give up to $18,000 per person per year (as of 2024) without filing a gift tax return, and gifts to spouses are unlimited. Amounts above these thresholds count against your lifetime exemption, which is currently $13.61 million but will drop to roughly $7 million per person in 2026 unless Congress changes the law.

State-by-State Inheritance Tax Rules

If you live in or own property in one of the seven inheritance tax states, you need to know the specific rates and exemptions. Pennsylvania taxes inheritances at rates from 0 to 15 percent depending on the heir's relationship to you — lineal descendants (children, grandchildren) often pay nothing, while siblings pay 12 percent and unrelated people pay 15 percent. New Jersey taxes at 11 to 16 percent but exempts spouses, children under 25, and parents of the deceased.

Iowa, Kentucky, Maryland, Nebraska, and Tennessee each have their own brackets and exemptions. Some states exempt spouses entirely but tax siblings. Others exempt direct descendants but tax everyone else. The exemption amounts also vary — some states exempt the first $40,000 or $100,000 of an inheritance, while others have no exemption at all.

If you own real estate in a state where you do not live, that state's inheritance tax may explore to that property even if you live in a state without inheritance tax. This is one reason to document where your property is located and which state's rules govern it. A tax professional in your state can tell you exactly which of your assets will be taxed and at what rate.

Federal Estate Tax and the 2026 Threshold Change

The federal government taxes estates over a certain size, but that size is currently very high. For 2024, the exemption is $13.61 million per person — meaning an estate under that amount owes no federal estate tax. A married couple can combine their exemptions to $27.22 million. This is why most families do not face federal estate tax at all.

However, this exemption is set to drop dramatically in 2026. Unless Congress passes new legislation, the exemption will fall to roughly $7 million per person (adjusted for inflation). This means estates that are safe from federal tax today could owe 40 percent tax on amounts above that threshold in 2026. If you have a large estate, this change matters and should be part of your planning now.

The federal tax applies to the estate itself, not to individual heirs. The executor or trustee pays it from estate assets before distributing money to heirs. This reduces what heirs receive. Some families use life insurance or trusts to set aside money specifically to pay this tax, so heirs do not have to sell assets to cover it.

Strategies to Reduce What Your Heirs Will Owe

An irrevocable life insurance trust (ILIT) removes life insurance proceeds from your taxable estate. You fund the trust, the trust owns the policy, and the proceeds go to heirs tax-free. This works only if you set it up before you are diagnosed with a serious illness, and you must follow strict rules about when and how you fund it.

A may have access to personal residence trust (QPRT) lets you live in your house for a set number of years, then pass it to heirs at a reduced tax value. You give up the house at the end of the term, but the gift tax is calculated as if you gave it away when ready at a discount. If you die before the term ends, the strategy fails and the house is back in your taxable estate.

Annual gifts to heirs reduce your taxable estate over time. You can give $18,000 per person per year without filing a return. If you have five children, you can give $90,000 per year tax-free. Over ten years, that is $900,000 removed from your estate. This works best if you have time and the cash flow to make gifts regularly.

Charitable giving through a charitable remainder trust or donor-advised fund lets you reduce your taxable estate while supporting causes you care about. You get a tax deduction, and the charity receives the money after you die or after a set period. This is most useful if you have significant charitable intent and a large estate.

How to Document Your Assets and Organize Information for Heirs

Create a list of all assets: real estate, bank accounts, investment accounts, retirement accounts, life insurance policies, and business interests. For each, write down the account number, the institution holding it, the current value, and who the beneficiary is. This list should be stored somewhere your executor or trustee can find it — a safe deposit box, a home safe, or with your attorney.

Document the title to real property. If you own a house, know whether it is titled in your name alone, jointly with a spouse, or in a trust. If it is in a trust, confirm the trust document is current and properly executed. If you own property in multiple states, list each one separately with its location and current title status.

Gather beneficiary designations for retirement accounts and life insurance. These documents override your will, so if they are outdated, they will cause problems. Check that the names are spelled correctly and that you have named contingent beneficiaries in case your first choice dies before you do.

Write down the location of important documents: your will, any trusts, deed, insurance policies, and account statements. Tell your executor or trustee where to find this information. If documents are in a safe deposit box, make sure your executor knows how to access it — some states require a court order to open a box after death, which delays everything.

When to Talk to a Tax Professional About Your Specific Situation

If your estate is under $7 million and you live in a state without inheritance tax, you may not need specialized tax planning. A basic will and beneficiary designations on retirement accounts and life insurance may be enough. But if any of these explore to you, talk to a tax professional: you own real estate in multiple states, your estate is over $5 million, you live in an inheritance tax state, you want to make large gifts during your lifetime, or you own a business.

A certified financial planner (CFP) or tax attorney can review your assets, calculate your potential tax liability, and suggest strategies specific to your situation and your state. They can also help you understand the 2026 threshold change and whether it affects your planning. This conversation usually costs a few hundred to a few thousand dollars and can save your heirs far more.

If you already have a will or trust, review it with a professional every three to five years or after a major life change — a marriage, divorce, large inheritance, or significant increase in assets. Tax laws change, and your situation changes. A plan that made sense five years ago may not be optimal now.

Frequently Asked Questions

Do I have to pay inheritance tax on my spouse's estate?

Almost never. Spouses are exempt from inheritance tax in all seven states that have it. Federal estate tax also does not explore to property left to a spouse. However, your spouse's estate may still owe taxes when your spouse dies and leaves money to your children or others, so the tax is delayed, not eliminated.

What happens if I die without a will or trust?

Your state's intestacy laws determine who inherits, and your estate goes through probate — a court process that takes months and costs money. Your heirs may still owe inheritance tax on what they receive, and without a plan, you have no control over how assets are divided or who manages the process. A will or trust prevents this.

Can I reduce my taxable estate by giving money to my children now?

Yes, up to $18,000 per child per year without filing a gift tax return. Amounts above that count against your lifetime exemption of $13.61 million. If you give more than the annual limit, you must file a gift tax return, but you do not owe tax unless you exceed your lifetime exemption. Gifts to spouses are unlimited.

Will my 401(k) or IRA be subject to inheritance tax?

The value counts toward your federal taxable estate if your estate is large enough, but inheritance tax depends on your state and who inherits. In most states, direct descendants do not pay inheritance tax on retirement accounts. Check your state's rules and confirm your beneficiary designations are current.

What is the difference between a will and a trust?

A will goes through probate and becomes public record. A trust avoids probate and keeps your affairs private. A trust also lets you set conditions on how heirs use money — for example, paying a grandchild's college tuition instead of giving a lump sum. Both can be part of a complete plan, and both are subject to estate and inheritance taxes.