Learn about inheritance taxes, including federal and state rules, thresholds, and strategies to minimize tax liability for heirs and beneficiaries.
Inheritance taxes: What you need to know
As an heir or beneficiary, it’s important to know what to expect financially when you inherit all or part of an estate. Here are 5 key takeaways:
- Inheritance taxes, if applicable, are paid by the person inheriting assets, whereas any estate taxes are paid by the estate before passing assets to heirs.
- There’s no federal inheritance tax in the U.S., but certain states impose inheritance taxes on beneficiaries based on the assets inherited and the relationship to the deceased.
- Inheritance taxes are state-specific and are only owed above certain thresholds and under certain conditions.
- Many estates don’t owe federal estate tax due to high exemption thresholds, and state taxes may be deductible on federal returns.
- Estate planning and professional guidance are key to minimizing taxes.
What's inheritance tax?
Inheritance tax is imposed on the transfer of assets when a beneficiary receives an inheritance. The amount owed, if any, depends on factors like the value of the assets inherited and the relationship between the deceased person and the heir. The beneficiary (the person receiving the inheritance) is responsible for paying the tax—not the estate.
Get answers to your top tax questions
Estate tax vs. inheritance tax: What’s the difference?
Estate tax is taken out of the decedent’s estate before any money or property is passed on to their heirs. In contrast, inheritance tax may be owed by the people who receive money or property from the estate. Some states impose both types of taxes.
| Estate tax | Inheritance tax | |
|---|---|---|
| Who pays | The estate (before distribution to heirs). | The beneficiary (after receiving assets). |
| How it’s assessed | On the total value of the decedent’s estate. | On each beneficiary’s inherited portion. |
| Federal or state | Federal and some states. | Some states (no federal inheritance tax). |
| Exemptions | $15 million lifetime exemption (2026).* Varies by state. | Varies by state and relationship to deceased. |
| Who’s typically exempt | Depends on estate value. | Spouses typically exempt; children often have reduced rates or exemptions. |
Who pays
The estate (before distribution to heirs).
How it’s assessed
On the total value of the decedent’s estate.
Federal or state
Federal and some states.
Exemptions
$15 million lifetime exemption (2026).* Varies by state.
Who’s typically exempt
Depends on estate value.
Who pays
The beneficiary (after receiving assets).
How it’s assessed
On each beneficiary’s inherited portion.
Federal or state
Some states (no federal inheritance tax).
Exemptions
Varies by state and relationship to deceased.
Who’s typically exempt
Spouses typically exempt; children often have reduced rates or exemptions.
*Combined federal estate tax and gift tax exemption.
Federal vs. state inheritance taxes
The United States doesn’t have a federal inheritance tax. However, depending on where you live or own real estate, your estate or beneficiaries may have to pay a state inheritance tax and possibly a combination of federal and state gift and estate taxes.
There are currently 5 states that impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
An estate tax is paid by an individual’s estate based on the net value of the estate. The estate consists of all the assets the decedent owned at the time of their death. Washington, D.C., and the following states impose state estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. If you live or own real estate in a location that imposes state estate taxes, contact a tax professional for more information.
Taxes can significantly affect how much passes from your estate to your heirs, so be sure to work with a professional when preparing your estate plan.
Federal estate tax
While there’s no federal inheritance tax, there’s a federal estate tax. Here’s how federal estate tax works:
- Most estates aren’t subject to federal estate tax as it applies only to estates that exceed $15 million or up to $30 million for spouses using portability. This means the surviving spouse can use the unclaimed portion of their deceased spouse’s estate and gift tax exemption.
- The estate—not the heirs—pays any tax due before assets are distributed.
- Certain deductions and exclusions may lower the estate’s tax liability.
- Thoughtful estate planning can help maximize the amount passed on to beneficiaries.
Because tax laws are complicated, it’s best to work with a professional when calculating the taxes owed on an estate.
Which states have an inheritance tax?
Five states currently impose inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rates, exemptions, and rules vary significantly by state.
In many cases, certain relatives are exempt from a state’s inheritance tax, or the rates may vary depending on the closeness of the inheriting relative. In some states, assets below certain dollar amounts are also exempt.
| State | Inheritance tax rate |
| Kentucky | 4% to 16% |
| Maryland | 10% |
| Nebraska | 1% to 15% |
| New Jersey | 11% to 16% |
| Pennsylvania | 4.5% to 15% |
State
Kentucky : 4% to 16%
Maryland : 10%
Nebraska : 1% to 15%
New Jersey : 11% to 16%
Pennsylvania : 4.5% to 15%
Important notes:
- If you inherit physical property or real estate in one of these states, you may owe inheritance tax even if you live elsewhere.
- Some states allow deductions for funeral expenses, debts, and estate administration costs.
- Filing deadlines vary by state (typically 8 to 12 months after death).
How much is inheritance tax?
The amount of inheritance tax owed is different for everyone, depending on the state of residence, value of the inheritance, and the type of asset inherited. It’s calculated based on the value of the assets being inherited and the relationship between the deceased person and their heirs. Each state’s rate range is shown in the chart above.
It’s best to consult with a tax professional or estate planning attorney to understand the specific tax implications and to ensure that the estate is managed efficiently. It’s also a good idea to discuss your wealth transfer plans with your heirs, so they know what to expect when you pass away.
Make sure your heirs know what to expect
Strategies for reducing inheritance taxes
Understanding the basics of estate planning can help you reduce inheritance taxes for your heirs. As a benefactor, you might consider making gifts to your heirs or to a charity or setting up an irrevocable trust.
Trusts can be used to transfer assets to heirs in a way that minimizes the inheritance tax liability. However, you should be aware of federal gift tax consequences and, in Connecticut, a state lifetime gift tax that may be imposed on certain gifts.1
Working with a professional and creating an estate plan today can help you determine which strategies for lowering your taxable estate will work best for you and your heirs.
Lifetime gifting
One way to avoid inheritance tax is to reduce the value of your estate by applying the strategy of lifetime gifting. This helps you transfer wealth to your beneficiaries now rather than including the assets in your taxable estate.
The IRS allows you to give away a certain amount each year without incurring gift tax. As of 2026, the annual gift tax exclusion is $19,000 per recipient. This means that you can give up to $19,000 to as many people as you want each year without incurring gift tax. Married couples can double this amount to $38,000 per recipient.
Additionally, there’s a federal lifetime gift tax exemption. As of 2026, the lifetime estate and gift tax exemption is $15 million per individual. That means a person can give away up to $15 million over their lifetime or at death without incurring gift tax.
Gift trusts
Creating an irrevocable trust is another way to reduce estate taxes that can help you give to your beneficiaries in a structured way. Once you transfer assets to the trust, they’re no longer considered part of your estate, which can help reduce the value of the inheritance, potentially lowering or eliminating inheritance tax liability.
However, it’s important to note that once you transfer assets to the trust, you’ll no longer have direct control over them. Be sure to consult with an estate planner or financial advisor to determine if creating a gift in trust is right for you and your heirs.
Combining lifetime gifting and trusts
One estate planning strategy is to combine lifetime gifting and trusts to help maximize tax benefits and protect your assets. You can use the annual gift tax exclusion to fund an irrevocable trust without incurring gift tax. So because the exclusion amount for 2026 is $19,000, you could gift up to that amount to an irrevocable trust.
You can also use your lifetime gift tax exemption to fund an irrevocable trust. The 2026 lifetime estate and gift tax exemption is $15 million per individual. So, if you transferred $5 million to an irrevocable trust, you’d reduce your estate value by $5 million and still have a remaining exemption of $10 million.
Do you have to pay taxes on an inherited brokerage account?
If you inherit from a decedent in a state with inheritance tax, you may have to pay it based on your relationship. You also may be subject to capital gains tax if you sell the assets at a profit.
When you inherit a brokerage account, the cost basis of the assets is usually “stepped up” to the fair market value on the date of the deceased’s death. If the account’s value grows before you sell the assets, you’ll be taxed on capital gains.
For example, if the deceased purchased the stock at $20,000 but it was worth $50,000 on the date of their death, your inherited basis would be $50,000. If you sell it when it’s worth $80,000, your capital gain would be $30,000.
Original purchase price:
$20,000
Date-of-death value:
$50,000
Inherited basis:
$50,000
Sale price:
$80,000
Capital gain:
$80,000 – $50,000 =
$30,000
The amount of capital gains tax you pay depends on your tax bracket and how long you hold the inherited assets before selling them. Generally, holding on to an asset for more than a year before selling it can lessen your tax burden as you’ll be subject to the long-term capital gains tax rate, rather than the short-term capital gains tax rate.
Inheritance tax FAQ
While there isn’t a federal inheritance tax, you may be subject to a state inheritance tax if you inherit in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania. Rates vary by state, the value of the assets inherited, and the relationship to the deceased. In most cases, beneficiaries do not have to pay federal income tax on inheritance.
The estate may have to pay federal estate taxes if the value of the estate is above $15 million per individual. State estate taxes may also apply.
If you don’t pay your inheritance taxes, the state may file a lien against your assets. This means that the state can seize your assets to pay the inheritance tax debt. The state may also charge you interest and penalties on the unpaid inheritance tax.
Yes, in most states you can get an extension to file your inheritance taxes, typically up to 6 months.
One of the challenges of planning for inheritance taxes is that the laws are constantly changing. It’s important to stay up to date on the latest changes so you can adjust your plan accordingly.
Another challenge is that it can be difficult to predict the future value of your assets. If you underestimate the value of your assets, your heirs may end up owing more in inheritance taxes.
Do you pay capital gains tax on inherited property?
Capital gains tax is only triggered when you sell inherited property, not when you receive it. When you inherit financial assets, certain collectables, or real estate, it’s generally “stepped up” to its fair market value on the date of the original owner’s death—meaning your cost basis resets to that value.
The taxes you pay after selling depends on the type of property (like personal items, real estate, collectables, and art). While both inherited items and real estate enjoy the step-up in fair market value, inherited real estate offers more tax-advantaged strategies for managing and minimizing capital gains taxes.
Plan your future with solutions from Vanguard Wealth Management.
Let one of our investment professionals help with your legacy needs.