While the federal estate tax affects only the wealthiest families, six states still impose inheritance taxes that can significantly impact middle-class families. These state-level taxes can take 4.5% to 18% of your inheritance, even if you’re not wealthy enough to owe federal estate taxes.
The harsh reality: Many families discover they owe thousands of dollars in state inheritance taxes they never expected. Unlike federal estate taxes, inheritance taxes are paid by the beneficiaries who receive the assets, not by the estate itself.
Understanding state inheritance tax laws is crucial for protecting your family’s wealth and ensuring you don’t face unexpected tax bills when you inherit assets.
Here’s everything you need to know about state inheritance taxes, which states impose them, and how to minimize your tax burden.
Understanding Inheritance Tax vs. Estate Tax
Key Differences
Estate Tax:
- Paid by estate: Tax is paid by the estate before assets are distributed
- Federal tax: Imposed by federal government
- High exemption: $13.61 million per person (2025)
- Affects wealthy: Only affects very wealthy families
Inheritance Tax:
- Paid by beneficiaries: Tax is paid by people who receive assets
- State tax: Imposed by individual states
- Lower exemptions: Much lower exemption amounts
- Affects more families: Can affect middle-class families
How Inheritance Tax Works
Tax Calculation:
- Based on relationship: Tax rates vary based on relationship to deceased
- Progressive rates: Higher rates for larger inheritances
- Exemptions: Some inheritances are exempt from tax
- Deductions: Certain deductions may reduce tax burden
Payment Requirements:
- Beneficiary responsibility: Each beneficiary pays their own tax
- Filing deadlines: Must file returns and pay taxes by deadlines
- Interest and penalties: Late payments subject to interest and penalties
- Professional help: May need professional assistance with compliance
States with Inheritance Taxes
Iowa
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 0% (completely exempt)
- Parents and grandparents: 0% (completely exempt)
- Siblings: 5% to 10%
- Other relatives: 10% to 15%
- Non-relatives: 15% to 20%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: Unlimited exemption
- Parents and grandparents: Unlimited exemption
- Siblings: $25,000 exemption
- Other relatives: $500 exemption
- Non-relatives: $500 exemption
Planning Considerations:
- Family relationships: Tax rates depend on relationship to deceased
- Exemption planning: Use exemptions to minimize tax burden
- Gift planning: Consider lifetime gifts to reduce inheritance tax
- Trust planning: Trusts may provide tax benefits
Kentucky
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 0% (completely exempt)
- Parents and grandparents: 0% (completely exempt)
- Siblings: 5% to 10%
- Other relatives: 10% to 15%
- Non-relatives: 15% to 20%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: Unlimited exemption
- Parents and grandparents: Unlimited exemption
- Siblings: $1,000 exemption
- Other relatives: $500 exemption
- Non-relatives: $500 exemption
Planning Considerations:
- Relationship planning: Consider relationship to deceased
- Exemption utilization: Maximize use of available exemptions
- Lifetime planning: Consider lifetime gifts and transfers
- Professional guidance: Work with experienced professionals
Maryland
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 0% (completely exempt)
- Parents and grandparents: 0% (completely exempt)
- Siblings: 10%
- Other relatives: 10%
- Non-relatives: 10%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: Unlimited exemption
- Parents and grandparents: Unlimited exemption
- Siblings: $1,000 exemption
- Other relatives: $1,000 exemption
- Non-relatives: $1,000 exemption
Planning Considerations:
- Flat rate structure: Same rate for all non-exempt beneficiaries
- Exemption planning: Use exemptions to minimize tax burden
- Lifetime gifts: Consider lifetime gifts to reduce inheritance tax
- Trust strategies: Trusts may provide tax benefits
Nebraska
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 1% to 6%
- Parents and grandparents: 1% to 6%
- Siblings: 1% to 6%
- Other relatives: 1% to 6%
- Non-relatives: 1% to 6%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: $40,000 exemption
- Parents and grandparents: $40,000 exemption
- Siblings: $15,000 exemption
- Other relatives: $10,000 exemption
- Non-relatives: $10,000 exemption
Planning Considerations:
- Progressive rates: Rates increase with inheritance size
- Exemption amounts: Higher exemptions than other states
- Family planning: Consider family relationships in planning
- Professional assistance: May need professional help
New Jersey
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 0% (completely exempt)
- Parents and grandparents: 0% (completely exempt)
- Siblings: 11% to 16%
- Other relatives: 15% to 16%
- Non-relatives: 15% to 16%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: Unlimited exemption
- Parents and grandparents: Unlimited exemption
- Siblings: $25,000 exemption
- Other relatives: $500 exemption
- Non-relatives: $500 exemption
Planning Considerations:
- High rates: Some of the highest inheritance tax rates
- Exemption planning: Critical to use available exemptions
- Lifetime gifts: Consider lifetime gifts to reduce tax burden
- Trust planning: Trusts may provide significant tax benefits
Pennsylvania
Tax Rates:
- Spouse: 0% (completely exempt)
- Children and grandchildren: 0% (completely exempt)
- Parents and grandparents: 0% (completely exempt)
- Siblings: 12%
- Other relatives: 15%
- Non-relatives: 15%
Exemptions:
- Spouse: Unlimited exemption
- Children and grandchildren: Unlimited exemption
- Parents and grandparents: Unlimited exemption
- Siblings: $25,000 exemption
- Other relatives: $3,500 exemption
- Non-relatives: $3,500 exemption
Planning Considerations:
- Flat rate structure: Same rate for each category
- Exemption amounts: Moderate exemption amounts
- Family planning: Consider family relationships in planning
- Professional guidance: Work with experienced professionals
Planning Strategies to Minimize Inheritance Tax
Lifetime Gifting
Annual Exclusion Gifts:
- Annual limit: $18,000 per person per year (2025)
- Married couples: $36,000 per person per year
- Tax-free gifts: Gifts within annual exclusion are tax-free
- Reduction of estate: Reduces size of taxable estate
Lifetime Exemption:
- Exemption amount: $13.61 million per person (2025)
- Married couples: $27.22 million combined
- Tax-free transfers: Transfers within exemption are tax-free
- Estate reduction: Reduces size of taxable estate
Gift Planning Strategies:
- Systematic gifting: Regular gifts to reduce estate size
- Appreciation removal: Remove future appreciation from estate
- Family relationships: Consider inheritance tax implications
- Professional guidance: Work with experienced professionals
Trust Planning
Irrevocable Trusts:
- Asset removal: Remove assets from taxable estate
- Control retention: May retain some control over assets
- Tax benefits: May provide inheritance tax benefits
- Professional management: Professional management of assets
Revocable Trusts:
- Estate planning: Part of overall estate planning
- Probate avoidance: Avoid probate process
- Privacy: Maintain privacy of estate planning
- Flexibility: Can be changed during lifetime
Specialized Trusts:
- Charitable trusts: Provide tax benefits and charitable giving
- Generation-skipping trusts: Transfer wealth to grandchildren
- Special needs trusts: Protect assets for disabled beneficiaries
- Business succession trusts: Transfer business interests
Family Planning
Relationship Planning:
- Marriage considerations: Marriage may provide tax benefits
- Adoption planning: Adoption may affect inheritance tax
- Family structure: Consider family structure in planning
- Professional guidance: Work with experienced professionals
Asset Planning:
- Asset location: Consider location of assets
- Asset types: Different asset types may have different tax treatment
- Valuation planning: Consider valuation of assets
- Professional appraisals: May need professional appraisals
Compliance and Filing Requirements
Filing Requirements
Tax Returns:
- Individual returns: Each beneficiary must file their own return
- Filing deadlines: Must file by specified deadlines
- Required information: Detailed information about inheritance
- Professional help: May need professional assistance
Payment Requirements:
- Tax payment: Must pay tax by specified deadlines
- Interest and penalties: Late payments subject to interest and penalties
- Payment methods: Various payment methods available
- Professional assistance: May need professional help
Record Keeping
Required Records:
- Inheritance documentation: Proof of inheritance received
- Valuation records: Documentation of asset values
- Tax calculations: Records of tax calculations
- Payment records: Proof of tax payments
Record Retention:
- Retention period: Keep records for specified period
- Audit protection: Records protect against audits
- Professional guidance: Work with professionals on record keeping
- Digital storage: Consider digital storage options
The Bottom Line: Why Understanding Inheritance Tax Matters
Understanding state inheritance taxes isn’t just about tax compliance. It’s about protecting your family’s wealth and ensuring you don’t face unexpected tax bills.
Tax Compliance: Ensure you comply with all applicable tax laws and avoid penalties.
Wealth Protection: Protect your family’s wealth from unnecessary tax burdens.
Planning Opportunities: Take advantage of planning opportunities to minimize taxes.
Peace of Mind: Know that your family’s financial future is protected.
Professional Guidance: Work with experienced professionals to ensure compliance.
Getting Started
You don’t need to understand every tax detail to protect your family’s wealth. You just need to:
- Understand the basics: Learn which states have inheritance taxes
- Know your situation: Understand how inheritance taxes might affect you
- Plan ahead: Consider planning strategies to minimize taxes
- Work with professionals: Engage experienced tax and estate planning professionals
The best inheritance tax planning is planning that actually gets implemented. Don’t let the complexity of tax laws prevent you from protecting your family’s wealth.
Your family’s financial future is worth protecting with the best available methods, not just hoping you won’t face inheritance taxes.
Ready to protect your family’s wealth from inheritance taxes? Start with Eternal Vault’s free plan to experience comprehensive estate planning tools and family protection. Questions about inheritance taxes? Contact our team for detailed guidance.
