What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before assets are distributed. It is based on the total value of the deceased's estate and applies federally (above $13.61M in 2024) and in some states. Inheritance tax is paid by the beneficiary after receiving assets. It depends on the beneficiary's relationship to the deceased and the amount received. Currently only 6 states impose inheritance taxes: Pennsylvania, Kentucky, Nebraska, Iowa, Maryland, and New Jersey.
Are spouses and children exempt from inheritance tax?
In most states with inheritance tax, spouses are completely exempt. Children are exempt in Pennsylvania (at a 0% rate), Kentucky, Maryland, and New Jersey, but owe tax in Nebraska (1% over $40,000) and Iowa (being phased out). Siblings generally face higher rates (6–16%). Unrelated beneficiaries face the highest rates — up to 18% in Nebraska. Charities are typically exempt in all states.
Can I avoid state inheritance tax?
Strategies vary: (1) Life insurance paid to a named beneficiary avoids probate and inheritance tax in most states; (2) Retirement accounts with beneficiary designations may be exempt; (3) Living trusts may reduce exposure in some states; (4) Gifting during lifetime avoids inheritance tax on the gifted amount (subject to gift tax rules); (5) Relocating to a non-inheritance-tax state before death avoids the tax entirely — but must be a genuine change of domicile.