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Estate Tax vs. Inheritance Tax: What’s the Difference?

Estate planning involves preparing to leave a legacy after you’re gone, typically by transferring your wealth to your loved ones. Planning doesn’t have to be complex, but it’s critical to understand the tax implications, especially around estate tax vs. inheritance tax. While both taxes relate to transferring wealth after someone passes, they differ in how and when they’re applied.

Here are the key differences between estate and inheritance taxes so you can confidently navigate estate planning.

What Is Estate Tax?

The estate tax is a tax on the total value of your assets at your passing before your beneficiaries receive any distributions. Your estate, not your beneficiaries, is responsible for paying this tax before any assets are distributed.

Estate taxes are imposed at the federal level and, in some cases, by individual states. However, most estates don’t have to pay federal estate taxes unless their value is above a certain threshold set by the IRS. In 2024, that limit is $13,610,000, and the federal estate tax rate ranges from 18% to 40% based on the taxable amount. Estates valued below this amount aren’t subject to estate tax.

Currently, 12 states plus the District of Columbia have an estate tax. The rates and exemption amounts vary.

  1. Connecticut: Top rate 12%. Threshold $9,100,000.
  2. Hawaii: Top rate 20%. Threshold $5,490,000.
  3. Illinois: Top rate 16%. Threshold $4,254,800.
  4. Maine: Top rate 12%. Threshold $6,010,000.
  5. Maryland: Top rate 16%. Threshold $5,000,000.
  6. Massachusetts: Top rate 16%. Threshold $1,000,000.
  7. Minnesota: Top rate 16%. Threshold $3,000,000.
  8. New York: Top rate 16%. Threshold $6,110,000.
  9. Oregon: Top rate 16%. Threshold $1,000,000.
  10. Rhode Island: Top rate 16%. Threshold $1,648,611.
  11. Vermont: Top rate 16%. Threshold $5,000,000.
  12. Washington: Top rate 20%. Threshold $2,193,000.
  13. District of Columbia: Top rate 16%. Threshold $4,000,000.

As you plan, check with your tax professional to ensure you know your state’s particular requirements, if any.

What Is Inheritance Tax?

Inheritance tax is a tax on the assets your beneficiaries receive from your estate. Unlike estate tax, your beneficiaries, rather than your estate, are responsible for paying inheritance tax.

Currently, only six states have inheritance taxes.

  1. Iowa: Up to 6%.
  2. Kentucky: Up to 16%.
  3. Maryland: Up to 10%.
  4. Nebraska: Up to 15%.
  5. New Jersey: Up to 16%.
  6. Pennsylvania: Up to 15%.

Maryland is the only state that has both inheritance and estate taxes. Iowa is planning to phase out inheritance taxes in 2025.

How Inheritance Tax Works

As with estate taxes, beneficiaries must pay inheritance taxes in certain states, and the tax rates and exemptions vary. For planning purposes, the state where you live matters for taxes, not your beneficiary’s home state.

For example, say you live in Ohio (no inheritance tax) and your beneficiaries live in Pennsylvania (inheritance tax). Even though Pennsylvania has an inheritance tax, the rules are governed by Ohio’s laws since that’s where you lived and owned property before passing. So your beneficiaries don’t have to pay inheritance tax.

In some states, the relationship between the deceased and the beneficiary determines how much inheritance tax they pay. In each of the six states that have an inheritance tax, if the surviving spouse is the beneficiary, they don’t have to pay the tax. In other states, surviving children and grandchildren may be exempt, while some offer a sliding scale of tax rates based on the relationship.

Estate Tax vs. Inheritance Tax

Here’s an overview of the key differences between estate tax and inheritance tax.

Who Pays the Tax?

Estate Tax

The estate pays the tax before assets are distributed to beneficiaries.

Inheritance Tax

Individual beneficiaries pay the tax after receiving their inheritance.

Do Federal or State Taxes Apply?

Estate Tax

The estate tax is imposed at federal and some state levels, with the federal tax only applying to estates above a certain threshold.

Inheritance Tax

Only certain states have an inheritance tax. There’s no federal inheritance tax.

Who Is Exempt?

Estate Tax

A high federal exemption means most estates don’t owe federal estate taxes. State exemptions vary.

Inheritance Tax

Inheritance tax exemptions typically depend on the relationship to the deceased, with close family members often exempt.

When Is the Tax Paid?

Estate Tax

The estate tax is paid before any assets pass to beneficiaries.

Inheritance Tax

The inheritance tax is paid after beneficiaries receive their inheritance.

How Can You Reduce Estate Taxes?

You can reduce estate taxes in a few ways. Speaking with a tax professional can help determine the right option for you.

Federal Estate Tax Exemption

The current exemption allows you to transfer significant wealth without taxes.

Lifetime Gifts

Gifting assets during your lifetime can reduce the size of your taxable estate (though limits apply).

Life Insurance

A life insurance death benefit can provide liquidity to pay estate taxes, helping save other assets for your beneficiaries.

Trusts

Certain trusts can help protect your assets from estate taxes.

Charitable Giving

Donating to qualified charities can help reduce your taxable estate and provide tax benefits.

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