Federal, state, and inheritance tax rules explained
Reviewed by Anthony Battle
Fact checked by Suzanne Kvilhaug
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Money or property you inherit may be subject to estate taxes and inheritance taxes, but it’s not likely. Most estates are not rich enough to qualify for the federal estate tax. The federal estate tax applies only to those whose estates are valued in the multiple millions. Surviving spouses are exempt.
Moreover, most states have neither an estate tax, which is levied on the estate, nor an inheritance tax, which is assessed against the recipient of the inheritance.
A dozen states levy estate taxes, and six have inheritance taxes. All set their limits lower than the federal thresholds.
Key Takeaways
- The IRS sets limits on estate values before they are subject to taxation.
- A dozen states impose their own estate taxes, and six have inheritance taxes, both of which kick in at lower threshold amounts than the federal estate tax.
- Federal and most state taxes are assessed only on the value of the estate or inheritance that exceeds the threshold amount.
- Surviving spouses are generally exempt from these taxes, regardless of the value of the estate or inheritance.
- To minimize estate taxes, taxpayers whose estates are above the threshold can set up trusts to facilitate the transfer of wealth.
Estate Taxes: An Overview
Estate taxes, whether federal or state, are assessed on the estate’s fair market value (FMV), not on the price that the deceased paid.
This means that any appreciation in the estate’s assets over time will be taxed, but it protects those who inherit assets that have dropped in value. For example, if a house was bought at $5 million, but its current market value is $4 million, the latter amount will be used for tax purposes.
Any part of the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn’t subject to estate tax. The right of spouses to leave any amount to each other is known as the unlimited marital deduction.
When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate’s value exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are excluded from the final calculation.
Important
As long as the estate in question does not exceed $13.99 million as of the 2025 tax year, you will not owe federal estate or inheritance taxes. However, keep an eye on your state for its current rules since some charge estate taxes or inheritance taxes with lower thresholds.
Declining an Inheritance
An heir due to receive money or other assets can choose to decline the inheritance through the use of an inheritance or estate waiver. The waiver is a legal document declining the rights to the inheritance.
In such an instance, the executor of the will would then name a new beneficiary of the inheritance.
An heir might choose to waive their inheritance to avoid paying taxes or to avoid having to maintain a house or other structure. A person in a bankruptcy proceeding might choose to sign a waiver so that the property can’t be seized by creditors.
State laws determine how these waivers work.
State Estate and Inheritance Taxes
The number of jurisdictions that have estate or inheritance taxes is declining, as opposition has risen to what some call death taxes.
That said, about a dozen states plus the District of Columbia continue to tax estates, and a half dozen impose inheritance taxes.
As with federal estate tax, these state taxes are collected only above certain thresholds. Even at or above those levels, your relationship to the deceased may spare you from some or all inheritance tax.
Notably, surviving spouses and descendants of the deceased rarely, if ever, have to pay this tax.
Federal Estate Taxes
The portion of the estate that's above the limit is taxed at a rate from 18% to 40%, depending on the amount of the excess and whether there have been any changes in federal laws. In practice, various discounts, deductions, and loopholes allow skilled tax accountants to reduce the effective rate of taxation to well below that level.
Among those techniques is to take advantage of flexibility over the valuation date of the estate in order to minimize the estate’s value or cost basis.
The rates of the tax are graduated, but the exemption is applied in the form of a credit and offsets taxes applied at the lower rates. The taxable estates are therefore effectively subject to a flat rate.
Note
State estate taxes are levied by the state where the deceased was living at the time of death. Inheritance taxes are levied by the state where the beneficiary lives.
State Estate Taxes
If you live in a state that has an estate tax, you’re more likely to feel its pinch than you are to pay federal estate tax. The exemptions for state and district estate taxes are all less than half those of the federal assessment. Some go as low, relatively speaking, as $1 million.
An estate tax is assessed by the state where the decedent was living at the time of death.
Here are the jurisdictions that have estate taxes. Click on the state’s name for further information from the state government on its estate tax.
- Connecticut
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington state
Tax is usually assessed on a sliding basis above these thresholds, much like the income tax brackets. The tax rate is typically about 10% for amounts just over the threshold, and it then rises in steps to about 16%.
State Inheritance Taxes
There is no federal inheritance tax, but some states still tax certain assets inherited from the estates of deceased persons. Whether your inheritance will be taxed (and at what rate) depends on its value, your relationship to the person who passed away, and the prevailing rules and rates where you live.
Life insurance payable to a named beneficiary is not typically subject to an inheritance tax, although life insurance payable to the deceased person or their estate is usually subject to an estate tax.
As with estate tax, an inheritance tax, if due, is applied only to the sum that exceeds the exemption. Tax is usually assessed on a sliding basis above those thresholds. Rates typically begin in the single digits and rise to 15%–18%.
Both the exemption you receive and the rate you’re charged may vary by your relationship to the deceased—more so than with the value of assets you are inheriting.
Inheritance Tax Exemptions
As a general rule, the closer your relationship with the decedent, the lower the rate you’ll pay.
Surviving spouses are exempt from inheritance tax in all states that tax inheritances. Domestic partners are also exempt in some states, and descendants generally pay no inheritance taxes (except in a few states).
Inheritance tax is assessed by the state where the person who inherits is living.
Spousal Benefits
Some states offer tax reductions for widows and widowers, such as a reduction in property taxes for a certain period of time. For example, in Florida, surviving spouses are entitled to receive a reduction in the taxable value of a property they own by a certain amount each year, in perpetuity or until they remarry.
Here are the jurisdictions that have inheritance taxes. Click on the state’s name for further information on its inheritance tax from the state government:
How to Minimize Estate Taxes
Keep the planning simple and the total amount of the estate below the threshold to minimize estate taxes. For most families, that’s easy. For those with estates and inheritances above the threshold, setting up trusts that facilitate the transfer of wealth can help ease the tax burden.
One way to reduce estate tax exposure is to use an intentionally defective grantor trust (IDGT), which is a type of irrevocable trust that allows a trustor to isolate certain trust assets to separate income tax from estate tax treatment on those assets. The grantor pays income taxes on any revenue generated by the assets, but the assets can grow tax free. This way, the grantor’s beneficiaries can avoid gift taxation.
You can reduce your estate taxes if you own a life insurance policy as well. On their own, life insurance proceeds are free of income tax at the federal level when they are paid to your beneficiary. But when the proceeds are included as part of your taxable estate for estate tax purposes, that might push your estate over the cutoff.
One way to make sure that doesn’t happen is to transfer ownership of your policy to another person or entity, including the beneficiary. Another possibility is to set up an irrevocable life insurance trust (ILIT).
What Assets Are Subject to Estate Taxes?
The dollar amount of estate assets subject to estate taxes is revised annually. Several states also charge estate taxes. Each state sets its own rules on exclusions and thresholds for taxation.
What Is the Difference Between an Estate Tax and an Inheritance Tax?
An estate tax is levied on the estate itself, while an inheritance tax is levied against the recipient of an inheritance from an estate. When state taxes apply, any estate tax is paid to the state where the deceased resided, while any inheritance tax is paid to the state where the recipient of the inheritance lives.
How Can I Avoid Estate Taxes?
Methods used by the very wealthy to avoid estate taxes include setting up a trust, such as an intentionally defective grantor trust (IDGT), which separates income tax from estate tax treatment. Also, a life insurance policy can be transferred so that it won’t be counted as part of your estate. Strategic use of gifting is yet another tactic. All of these strategies are best managed by a professional tax consultant to make sure they are done properly.
The Bottom Line
Inheritance taxes are complex and change frequently. Most of us engage with them during a stressful and busy period of our lives. It’s wise to prepare for the inevitable by doing some homework in advance.
Consider meeting with a lawyer, CPA, or CFP to begin planning your estate and minimizing the tax your beneficiaries will have to pay when they inherit.
