Understanding Inheritance and Estate Taxes: What You Need to Know

Tax implications related to death are unavoidable, but individuals can take steps to manage the impact of estate and inheritance taxes. When someone passes away, taxes on the transfer of assets—either as estate or inheritance taxes—may apply to the properties and wealth left behind. This article clarifies the differences between these taxes and highlights the states that impose one or both types of taxation.

Estate and inheritance taxes
Estate taxes are charges on the total value of a decedent’s assets transferred to heirs after death.

The estate tax is calculated based on the estate’s worth. The federal exemption amount is set at $5.49 million, with a maximum rate of 40%. Only the estate’s value exceeding this exemption is taxed. While federal estate taxes are generally unavoidable, state estate taxes can often be avoided depending on your location. As of 2017, 14 states along with the District of Columbia impose their own estate taxes, including Washington, Massachusetts, Oregon, Rhode Island, Minnesota, Maine, Connecticut, Vermont, New York, New Jersey, Maryland, Illinois, Hawaii, and Delaware.

Inheritance taxes differ, applying to the property or assets received by individual beneficiaries. This means each inheritor pays taxes on assets, money, or property they receive from the estate. While estate taxes are levied on the estate itself, inheritance taxes are paid by each individual beneficiary. As of 2017, six states—Maryland, Iowa, Kentucky, Nebraska, Pennsylvania, and New Jersey—impose inheritance taxes.

Tax thresholds and rates
Washington stands out as one of the most expensive states to pass away in, with a top inheritance tax rate of 20% and an exemption limit of only $2.1 million. Its rate exceeds other states like Oregon, Massachusetts, and D.C., which have maximum rates of 16% and exemptions of just $1 million. Minnesota and Rhode Island follow, with a 16% rate and exemptions of $1.8 million and $1.15 million respectively. Connecticut's inheritance tax is 12% with a $12 million exemption, while Maine also taxes at 12% with a $5.49 million exemption.

Regarding inheritance taxes, Nebraska charges the highest at 18% with a $10,000 exemption. Kentucky’s rate is 16% with a $500 exemption. Pennsylvania and Iowa both levy 15%, with no exemptions. Maryland and New Jersey face dual estate and inheritance taxes; Maryland’s exemption is only $1,000 with a 10% rate, while New Jersey’s rates depend on the relationship between decedent and heir, as well as the amount inherited.

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