What inheritance tax is and who pays it

Inheritance tax is a tax on money or property you receive from someone who has died. It is different from estate tax, which is paid by the person's estate before anything is distributed to heirs. Only six states currently have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The federal government does not have an inheritance tax, though it does have an estate tax that applies to very large estates.

In states with inheritance tax, the amount you owe depends on your relationship to the person who died, the value of what you received, and the state's tax rates and exemptions. Spouses are almost always exempt. Children, parents, and siblings usually pay lower rates than unrelated people. The tax is typically paid by the person who inherits, not by the estate.

If you live in a state without inheritance tax, you owe nothing to that state regardless of what you inherit. If you live in a state with inheritance tax but inherited from someone who lived elsewhere, you may still owe tax to your state on certain types of property.

Key Takeaways

  • Only six states tax inheritances, and spouses are exempt in all of them; children and siblings pay lower rates than unrelated heirs.
  • The person who died can reduce what heirs owe by giving away money during their lifetime, since lifetime gifts often have higher exemption thresholds than estates.
  • Certain types of assets—life insurance, retirement accounts with named beneficiaries, and property held in trust—can pass to heirs outside the taxable estate.
  • If you have already inherited and owe tax, you may be able to disclaim (refuse) the inheritance within nine months to pass it to the next heir and avoid the tax.
  • An estate planning attorney in your state can show you which strategies apply to your situation and which ones save the most money.

Lifetime gifts and the annual exclusion

One of the most straightforward ways to reduce inheritance tax is for the person who will leave the estate to give money or property away while they are still alive. In most states, lifetime gifts are not subject to inheritance tax at all. This means a parent can give a child $10,000, $50,000, or more during their lifetime and the child owes no tax on it.

The federal government allows each person to give up to a certain amount per year to any number of people without filing a gift tax return. This amount changes yearly—it was $18,000 per person in 2024 and $19,000 in 2025. A married couple can give twice that amount. These gifts do not count against the lifetime exemption, so they are one of the cleanest ways to move money to heirs.

Beyond the annual amount, a person can give away larger sums during their lifetime using their lifetime exemption. The federal lifetime exemption is very high—over $13 million per person in 2024—but some states have much lower exemptions. Gifts that exceed the annual amount but stay within the lifetime exemption do not result in a tax bill, though they do require filing a gift tax return with the IRS.

Using trusts to keep assets outside the taxable estate

A revocable living trust is a legal document that holds property in the name of the trust rather than in the person's individual name. When the person dies, the property in the trust passes directly to the named beneficiaries without going through probate and without being counted as part of the taxable estate in most states. This can reduce or eliminate inheritance tax.

An irrevocable trust is more restrictive—once created, the person who set it up cannot change it or take the money back—but it removes assets from the taxable estate entirely. This is a stronger tool for tax reduction but requires giving up control of the money during your lifetime. Irrevocable trusts are most useful when set up years before death, because assets transferred into them early have more time to grow outside the taxable estate.

Trusts must be set up before death and funded with the assets you want them to hold. Simply naming a trust in your will does not accomplish this. An estate planning attorney can draft the trust document and advise you on whether a revocable or irrevocable trust makes sense for your situation.

Beneficiary designations and accounts that pass outside the estate

Certain assets automatically pass to a named beneficiary when you die, bypassing the taxable estate entirely. These include life insurance policies, retirement accounts (401(k)s, IRAs), and payable-on-death bank accounts. Because these assets do not go through the estate, they are not subject to inheritance tax in most states, even though they may be subject to federal estate tax if the total estate is very large.

The key is to name a beneficiary on each account or policy. If you do not name a beneficiary, the asset goes into your estate and becomes subject to inheritance tax. If you name your estate as the beneficiary, the same thing happens. Reviewing and updating beneficiary designations every few years—especially after marriage, divorce, or the birth of children—is one of the simplest ways to control where money goes and what taxes apply.

Some states allow you to register property such as real estate or vehicles as "transfer on death" or "payable on death," which means the property passes directly to the named person without going through the estate. Check with your state's motor vehicle department or land records office to see if this option is available for the types of property you own.

Disclaiming an inheritance to avoid the tax

If you have already inherited money or property and you do not want to keep it, you can disclaim it—formally refuse it—within nine months of the person's death. When you disclaim, the inheritance passes to the next person in line as if you had died before the person who left it to you. This can be useful if you do not need the money and want to avoid paying inheritance tax on it.

A disclaimer must be in writing and filed with the court or the estate's executor. It must be done within the nine-month window and cannot be conditional—you cannot disclaim part of an inheritance and keep the rest, except in limited circumstances. Once you disclaim, you have no claim to that property and cannot change your mind.

Disclaiming makes sense only in specific situations: if you are already financially secure, if the tax bill would be substantial, or if you want the money to go to your children instead. Talk to an estate attorney before disclaiming, because the decision is permanent and the timing is strict.

State-specific rules and exemptions

The six states with inheritance tax each have different rules about who pays, how much, and what is exempt. Maryland and New Jersey exempt spouses, children, and grandchildren entirely. Pennsylvania exempts spouses and children but taxes siblings and more distant relatives. Iowa, Kentucky, and Nebraska have their own exemption structures and rate schedules.

All six states exempt certain types of property, such as life insurance proceeds, retirement accounts, and property that passes to a surviving spouse. Some states exempt property that passes to a charity. The value of the exemptions and the tax rates vary significantly, so the amount you owe depends entirely on which state you live in and which state the person who died lived in.

If you live in one of these six states or inherited from someone who did, look up your state's inheritance tax rules or speak with a local tax professional. The rules are specific enough that general advice does not apply, and the difference between paying tax and not paying it often comes down to understanding your state's particular exemptions.

Working with an estate planning attorney

The most effective way to reduce inheritance tax is to plan before death with an attorney who knows your state's rules. An estate planning attorney can review your assets, your family situation, and your state's tax laws to recommend which strategies will save the most money. They can draft trusts, update beneficiary designations, and structure gifts in a way that minimizes tax.

Estate planning is not expensive relative to the tax savings it can produce. A basic plan with a will and revocable trust typically costs $1,000 to $3,000, depending on the complexity and your location. If your estate is large or your family situation is complicated, the cost may be higher, but the tax savings usually far exceed the attorney's fee.

If you have already inherited and are facing a tax bill, a tax attorney or CPA in your state can review your options, including whether disclaiming is still possible or whether you can claim any deductions or exemptions you may have missed.

Frequently Asked Questions

Do I owe inheritance tax if I live in a state that does not have one?

No. If you live in a state without inheritance tax, you owe nothing to your state on any inheritance, regardless of how much you receive or where the person who died lived. You may owe federal estate tax if the total estate is extremely large, but that is a separate matter and applies only to estates worth more than about $13 million per person.

Can I reduce what my heirs will owe by giving money away now?

Yes. You can give up to $19,000 per person per year (in 2025) with no tax consequences. Larger gifts use your lifetime exemption but do not result in a tax bill. Gifts made during your lifetime are not subject to inheritance tax in most states, making this one of the simplest ways to reduce what heirs will owe.

What happens if I do not name a beneficiary on my life insurance or retirement account?

The money goes into your estate and becomes subject to inheritance tax (and possibly federal estate tax). Naming a beneficiary keeps the asset outside the taxable estate and usually avoids inheritance tax entirely. Review your beneficiary designations every few years to make sure they reflect your current wishes.

Is it too late to reduce inheritance tax if someone has already died?

You may still have options. If you are the heir, you can disclaim the inheritance within nine months to pass it to the next person and avoid the tax. If the estate is still being settled, the executor may be able to claim deductions or use exemptions that reduce the tax bill. Speak with a tax attorney or CPA in your state right away.

How much does it cost to set up a trust or other estate plan?

A basic estate plan with a will and revocable trust typically costs $1,000 to $3,000, depending on your location and the complexity of your assets. More complex plans cost more, but the tax savings usually justify the expense. Many attorneys offer free initial consultations, so you can discuss your situation before committing to a fee.