Educational guide — not tax or legal advice. Tax rules change. Consult a CPA or estate attorney about your specific situation.
The plain-English distinction
Two taxes with similar names but different mechanics:
Estate tax
- Paid by: The estate (before distribution to heirs)
- Calculated on: The total value of the deceased’s estate above the exemption threshold
- Who writes the check: The executor, from estate assets
- What heirs actually receive: Whatever’s left after the estate tax is paid
The estate tax is essentially a “transfer tax” on large estates passing from one generation to the next. For most estates it doesn’t apply because the exemption is high.
Inheritance tax
- Paid by: Each heir (after receiving the inheritance)
- Calculated on: The amount each heir receives, often with rates depending on relationship to the deceased
- Who writes the check: The heir
- What heirs actually receive: The gross amount minus their own inheritance tax payment
Inheritance tax is essentially a “receipt tax” on the heir. The rate often depends on how closely related the heir is to the deceased — spouses and children typically pay less or nothing; siblings, friends, and unrelated heirs typically pay more.
The key practical difference: an estate tax bill reduces what’s left for everyone; an inheritance tax bill is paid by each individual heir based on their share.
The federal picture
Federal estate tax exists, but only affects very wealthy estates
The federal estate tax has been around in various forms since 1916. Key 2025 figures:
- Exemption per person: $13.99 million
- Effective exemption for married couples (with portability): $27.98 million
- Top tax rate: 40%
Only estates above the exemption owe federal estate tax. Below the exemption: zero federal estate tax.
The exemption is scheduled to revert to roughly $7 million per person (inflation-adjusted from the 2018 baseline) after December 31, 2025, unless Congress acts. This sunset provision is one of the biggest open questions in current estate planning.
Practical impact: Even at the lower projected exemption, federal estate tax would affect only a small percentage of households — probably under 1% of estates. For most Americans, federal estate tax is not a planning concern.
There is no federal inheritance tax
The federal government does not impose an inheritance tax. Heirs don’t owe federal income tax on inherited property in most cases either.
- An inherited house, savings account, or investment account is not federally taxable income to the heir.
- Inherited retirement accounts (IRAs, 401ks) are taxable when distributions are taken, not at the moment of inheritance. The SECURE Act of 2019 requires most non-spouse beneficiaries to distribute inherited retirement accounts within 10 years.
- The stepped-up cost basis for inherited property usually eliminates capital gains tax on appreciation that occurred during the deceased’s life. See Do You Pay Inheritance Tax on a House?.
State-by-state landscape
This is where it gets complicated. States have their own rules:
States with their own estate tax
Twelve states plus DC impose a state-level estate tax on top of (or instead of) the federal estate tax. The thresholds are typically much lower than the federal exemption:
| State | 2025 estate tax exemption |
|---|---|
| Oregon | $1 million |
| Massachusetts | $2 million |
| Washington | ~$2.2 million |
| Maryland | $5 million |
| Minnesota | $3 million |
| Illinois | $4 million |
| Rhode Island | ~$1.8 million |
| Vermont | $5 million |
| Maine | $7 million |
| Hawaii | $5.49 million |
| New York | $7.16 million |
| Connecticut | aligned with federal ($13.99M) |
| District of Columbia | $4.87 million |
Top state estate tax rates range from about 12% to 20% depending on the state.
If you live in or own real estate in one of these states, the state estate tax may apply even if the federal estate tax doesn’t.
States with inheritance tax
Six states have a state inheritance tax (though two are phasing it out):
| State | Tax range | Spouses exempt? | Lineal descendants exempt? |
|---|---|---|---|
| Pennsylvania | 0-15% | Yes | 4.5% to children |
| New Jersey | 0-16% | Yes | Yes |
| Kentucky | 0-16% | Yes | Yes |
| Maryland | 0-10% | Yes | Yes (with exemption) |
| Iowa | Repealed for deaths after 1/1/2025 | — | — |
| Nebraska | Phasing out; 1% on lineal descendants | Yes | Reduced rate |
The rate typically depends on the heir’s relationship:
- Class A heirs (spouse, children, parents): often 0% or low single digits
- Class B heirs (siblings, sometimes nieces and nephews): moderate rates
- Class C heirs (friends, unrelated parties): highest rates (10-16%)
Pennsylvania is the most commonly encountered inheritance-tax state because its rates apply to all real and personal property in PA, regardless of where the deceased lived.
Maryland is unusual
Maryland has both an estate tax (with a $5 million exemption) and an inheritance tax. Most heirs are exempt from the inheritance tax — only collateral relatives and unrelated heirs pay it.
States with neither
The remaining ~32 US states have neither a state estate tax nor a state inheritance tax. Heirs in these states owe no state-level tax on inheritance — only the federal estate tax if the federal threshold is exceeded.
What does it mean for your planning?
A few honest scenarios:
Most middle-class American households
- No federal estate tax (estate is well under $13.99M)
- No federal inheritance tax (doesn’t exist)
- No state estate tax if you’re in a state without one
- No state inheritance tax if you’re in a state without one
For most Americans, neither tax applies. Estate planning is about probate avoidance, beneficiary designations, and family clarity — not tax planning.
Households approaching $5-10 million in net worth
- Federal estate tax: probably not, unless the exemption sunsets significantly
- State estate tax: may apply in some states (MA, OR, WA, MN, IL, RI, VT, ME, MD)
- State inheritance tax: may apply if deceased lived in PA, NJ, KY, MD
For these households, state estate or inheritance tax may be more impactful than federal estate tax. State-specific planning can matter.
Households above $15 million
- Federal estate tax: likely applies above the exemption
- State estate tax: may apply
- Planning becomes meaningful — irrevocable trusts, generation-skipping trusts, gifting strategies, business succession planning
For these households, working with a specialist estate planning attorney is usually money well spent.
A simple decision tree
To figure out whether you’d owe estate or inheritance tax:
- Is your total estate above $13.99M? If yes, federal estate tax may apply.
- Do you live in (or own real estate in) a state with state estate tax? If yes, check the threshold.
- Do you live in PA, NJ, KY, or MD? (or are you inheriting from someone who did?) If yes, state inheritance tax may apply based on your relationship.
If “no” to all three: no estate or inheritance tax applies.
Practical tax-reduction strategies (high level)
For households where tax actually applies:
- Lifetime gifting: each person can give $19,000 per recipient per year (2025) without affecting the gift/estate exemption. Spouses can combine to $38,000 per recipient. Gifts to charity are unlimited and deductible.
- Irrevocable life insurance trust (ILIT): removes life insurance death benefit from the taxable estate.
- Generation-skipping trust: passes assets to grandchildren in a tax-advantaged way (subject to the GST exemption).
- Charitable remainder trust (CRT): provides income during life with the remainder going to charity, reducing the taxable estate.
- Family limited partnerships: can reduce the valuation of business interests for estate tax purposes.
- State residency planning: moving from a state with estate or inheritance tax to one without can substantially reduce taxes. (Note that simply changing your “domicile” requires real lifestyle changes — voter registration, driver’s license, primary residence, time spent in the new state.)
These are advanced strategies. Don’t implement any of them without working with a qualified estate planning attorney and tax advisor.
Common questions
Will my heirs owe income tax on what they inherit? Generally no for cash, real estate, and most other property. Yes for retirement accounts (distributions are taxable; the SECURE Act requires most non-spouses to distribute within 10 years).
Does my will affect estate tax? The structure of the will and how you leave assets can affect estate tax in some cases. For example, leaving everything to your spouse uses the unlimited marital deduction (no estate tax at the first death). For most middle-class estates this doesn’t matter; for large estates it can matter substantially.
Does a trust avoid estate tax? A revocable living trust does NOT reduce estate tax. The assets are still in your estate for tax purposes because you control the trust.
An irrevocable trust can reduce estate tax because you give up control of the assets — they’re no longer in your taxable estate. But irrevocable trusts are exactly what they say: irrevocable. You can’t change your mind.
What about state inheritance tax on life insurance? Most states exempt life insurance from inheritance tax if it’s paid directly to a named beneficiary (not the estate). Pennsylvania specifically exempts life insurance.
What about retirement accounts and estate tax? Inherited retirement accounts are included in the deceased’s estate for estate tax purposes (if above the exemption). The income tax on distributions is separate and paid by the beneficiary as they take distributions.
Will the federal estate tax exemption really drop? Under current law, yes — the exemption is scheduled to revert to roughly half its current level on January 1, 2026. Whether Congress will extend the higher exemption is uncertain as of mid-2025.
Related reading
- Do You Pay Inheritance Tax on a House?
- Is Life Insurance Taxable to the Beneficiary?
- What Is Estate Planning
- Will vs. Trust: Which Do You Need?
- What Is Probate
- How to Avoid Probate
- Estate Planning Checklist
Educational information only — not tax, legal, or financial advice. Tax rules change. Consult a CPA or estate attorney about your specific situation. Sources: IRS estate and gift tax guidance; Tax Cuts and Jobs Act of 2017; SECURE Act of 2019; state Departments of Revenue (PA, NJ, KY, MD, IA, NE); state estate tax statutes (MA, OR, WA, MN, IL, RI, VT, ME, HI, NY, CT, DC).