Inheritance Tax Guidelines and Strategies

Inheritance tax is a state tax a beneficiary pays when they inherit assets like money or property after the death of a loved one. There is no federal inheritance tax in the U.S. and, as of 2024, only a handful of states impose an inheritance tax to beneficiaries. The tax is assessed by the state where the decedent lived.

If the recipient lives in a state with inheritance tax, that has no effect on whether the tax is imposed. The inherited assets will only be taxed if the decedent lived in a state that imposes an inheritance tax. Additionally, even if the decedent lived in one of these states, the inheritance may be exempt – or, at the very least, the beneficiary may be able to get a reduction in the amount of tax they pay, depending on their relationship to the decedent.

States that impose inheritance tax

Currently, the states with inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each state’s inheritance tax range is different, as are the exemption amounts. Most of these states provide lower tax rights, or outright exemptions from tax, for certain family members. These rates and exemptions are summarized below:

Iowa

• No inheritance tax on transfers to spouse, lineal ancestors, and descendants
• Top rate of 4% for siblings and children-in-law
• Top rate of 6% for all other family members and individuals
• Iowa inheritance tax will phase out in 2025

Kentucky

• No inheritance tax on transfers to spouse, siblings, lineal ancestors, and descendants
• Top rate of 16% and $1,000 exemption for certain family members
• Top rate of 16% and $500 exemption for all others

Maryland

• No inheritance tax on transfers to spouse, siblings, lineal ancestors, and descendants
• Top rate of 10% on transfers to others

Nebraska

• No inheritance tax on transfers to spouse
• 1% top rate and $100,000 exemption for parents, grandparents, siblings, children
• 11% top rate and $40,000 exemption for uncles, aunts, nieces, nephews, other lineal descendants
• 15% top rate and $25,000 exemption for all others

New Jersey

• No inheritance tax on transfers to spouse or lineal ancestors and descendants
• Top rate of 16% and $25,000 exemption for siblings and children-in-law
• Top rate of 16% and no exemption for all others

Pennsylvania

• No inheritance tax on transfers to spouse or to a parent from a child aged 21 or younger
• Top rate of 4.5% for lineal ancestors and descendants
• Top rate of 12% for siblings
• Top rate of 15% for all others

How inheritance tax works

When the owner of the estate passes away, the estate’s executor is responsible for dividing up its assets and distributing them to the chosen recipients. If the decedent lived in a state that has inheritance tax – and if the inheritor or assets are not exempt – then the inheritor is responsible for paying the tax. The state imposing the inheritance tax calculates the amount owed by determining the fair market value of the assets received at the time of the owner’s passing.

When inherited assets are taxable

Assets that may be subject to inheritance tax include:

• Bank accounts
• Stocks and bonds
• Mutual funds
• ETFs
• Real estate
• Motor vehicles
• Businesses
• Art
• Antiques
• Jewelry
• Collectibles
• Land/mineral rights
• Life insurance
• Boats/watercraft
• Digital currency

Each of the states that impose an inheritance tax have a different exemption threshold and associated rules, so it’s best to consult with an attorney to understand which assets are taxable and for how much.

Inheritance tax vs. estate tax

The major difference between inheritance tax and estate tax is who is responsible for paying the tax. With inheritance tax, the recipient inheriting the assets is responsible for paying. However, estate tax is paid by the owner’s estate before assets are distributed to beneficiaries.

Another difference is that estate taxes are imposed at a federal level, as well as by some states. As of 2024, 12 states plus Washington, D.C. impose estate taxes and six states impose inheritance taxes. Maryland is the only state to impose both an estate tax and an inheritance tax. Federal estate tax is not owed unless the value of the estate exceeds the exemption amount. For people who pass away in 2024, the exemption amount is $13,610,000 (up from $12.92 million in 2023). Married spouses can combine their exemptions for a total of $27,220,000 if both spouses were to pass away in 2024. The surviving spouse can inherit their deceased spouse’s unused exemption amount by filing a federal estate tax return and making a “portability” election.

How to minimize or avoid inheritance tax

One of the most effective ways to help minimize your tax burden — or that of your loved ones — is to use gifting strategies and financial tools like trusts. Gifting cash — or other assets like stocks, automobiles, or collectibles — can help you start distributing your assets ahead of time. In 2024, the maximum non-taxable and non-reportable gift amount you can give is $18,000 to an individual. To ensure you’re using the right gifting strategies, be sure to get help from a qualified estate planning professional.

Another great option is setting up a revocable trust to put aside investments and property for future recipients. Revocable trusts keep assets accessible if you need to take them out for whatever reason. Irrevocable trusts, as their name suggests, mean that your assets are in the trust until the owner’s death.

One last thing: Understanding capital gains tax

In addition to inheritance tax and estate tax, you also want to consider the capital gains tax. If a beneficiary sells inherited assets that have appreciated in value since disbursement, they may be required to pay capital gains tax on the profits.

Different states have different rules, and beneficiaries may also need to pay state income tax on distributions from inherited 401(k) accounts or IRAs because those assets create taxable ordinary income.

For more information on navigating inheritance tax, speak with your advisor. And if you are not a Mercer Advisors client, let’s talk.