Inheritance Tax

Inheritance Tax: What It Is, How It Works, and Who Pays It

What is an inheritance tax?

An inheritance tax is a state-level tax on the value of assets received by a beneficiary after someone dies. Unlike an estate tax (which is levied on the deceased person’s estate before distribution), an inheritance tax is assessed on the recipient and varies by the beneficiary’s relationship to the decedent and the size of the bequest.

Key points
* Inheritance tax is not a federal tax — it applies only in certain states.
* The tax is based on the value each beneficiary receives, not the total estate value.
* Most immediate family members are often exempt or receive favorable thresholds.
* Only a small share of heirs ever owe inheritance tax.

How inheritance tax works

Whether a beneficiary must pay inheritance tax depends mainly on:
1. The decedent’s state of residence or where their property is located (state rules apply, not the beneficiary’s state).
2. The beneficiary’s relationship to the decedent (spouses and close relatives frequently exempt).
3. The value of the inheritance relative to state thresholds and exemption amounts.

If the decedent lived in a state with an inheritance tax, beneficiaries falling outside exempt classes or above exemption thresholds may owe tax. In many states, immediate family members are either fully exempt or have generous exemptions, so only distant relatives or unrelated heirs typically pay.

Beneficiaries generally file and pay inheritance tax returns, though in some jurisdictions an executor may file on their behalf.

States that impose inheritance tax

As of 2025, five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Iowa previously had an inheritance tax but eliminated it effective for deaths on or after Jan. 1, 2025.)

State summaries
* Kentucky
* Immediate family (spouses, parents, children, siblings) are exempt.
* Other relatives (excluding cousins) get a modest exemption; cousins and unrelated heirs have smaller exemptions.
* Rates vary by class and amount, roughly 4%–16% depending on thresholds.
* Maryland
* Immediate family and charities are exempt; small estates (typically $50,000 or less) may be exempt.
* Other beneficiaries have a small exemption (commonly $1,000).
* Flat rate of about 10%.
* Maryland is unique in imposing both an estate tax and an inheritance tax.
* Nebraska
* Spouses, relatives under age 22, and charities are fully exempt.
* Immediate family often have a larger exemption (e.g., up to $100,000) with a low rate (around 1%) on amounts above that.
* More distant relatives and unrelated heirs face lower exemptions and higher rates (double-digit percentages for some classes).
* New Jersey
* Spouses, children, parents, grandchildren and charities are exempt.
* Siblings and in‑laws may have limited exemptions (e.g., up to $25,000).
* Rates depend on relationship and size, typically in the 11%–16% range for nonexempt classes.
* Pennsylvania
* Spouses and minor children (21 and under) are exempt.
* Adult children, grandparents and parents have a small exemption (e.g., about $3,500).
* Rates vary by relationship: common brackets include 4.5%, 12%, and 15%.

(Exemption amounts and rates change over time—check the state revenue agency for current details.)

Inheritance tax vs. estate tax

• Estate tax: levied on the decedent’s estate before distribution; the estate pays it.
• Inheritance tax: levied on the beneficiary based on what they receive; the beneficiary pays it.
  Both are calculated using fair market values as of the date of death, but they operate at different stages and against different taxpayers. In some rare cases both taxes can apply to the same transfer.

How to minimize or avoid inheritance tax

Common strategies to reduce beneficiaries’ inheritance-tax exposure include:
* Life insurance: Proceeds paid directly to a named beneficiary are generally not subject to inheritance tax.
* Irrevocable trusts: Assets moved into an irrevocable trust are typically removed from the estate and may avoid being treated as inherited property.
* Gifting during life: Making lifetime gifts (within federal and state rules) can reduce the value of property subject to inheritance rules.
* Estate planning with professional advice: Proper use of trusts, beneficiary designations, and ownership structures tailored to state rules can limit tax exposure.

Note: Strategies may have other tax, legal, or income consequences. Consult an estate-planning attorney or tax advisor familiar with the relevant state law.

Who files and pays

Beneficiaries are usually responsible for filing inheritance tax returns and paying the tax, but executors or administrators may be required to file or can do so on beneficiaries’ behalf depending on state procedure and deadlines. Deadlines, required forms, and payment rules vary by state.

Bottom line

Inheritance tax is a state-level tax paid by beneficiaries in a small number of states. Most immediate family members are often exempt or face generous thresholds, so only distant relatives or large bequests typically trigger tax liability. If you live in or expect assets in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, review state rules and consider estate-planning tools (life insurance, trusts, gifting) to reduce potential inheritance-tax exposure.