Estate Tax vs. Inheritance Tax — All You Need To Know

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If you are navigating probate after a loved one’s death, you’ve likely encountered quite a few terms and concepts you’re unfamiliar with. Estate tax and inheritance tax are two terms you may have seen during your research. But which one applies to your loved one’s estate?

Like many aspects of probate law, taxes vary by state. For example, Oklahoma probate law is much different than probate in, say, Alaska. Understanding the differences between estate tax vs. inheritance tax and knowing which states charge which taxes can help streamline probate.

Estate Tax vs. Inheritance Tax

Estate tax and inheritance tax are two types of taxes that may arise after a person’s death.

• Estate taxes are charged against the decedent’s estate. The executor pays these taxes out of the estate’s funds.
• Inheritance taxes are charged against the decedent’s beneficiaries. Each beneficiary pays a certain amount of tax based on what they inherited and their relationship to the decedent.

Generally, you may need to pay one or the other, not both. Not every state charges an estate or inheritance tax, either.

Which States Charge an Estate Tax?

The IRS charges a federal estate tax that applies to every state in the U.S. However, only estates worth more than $13.61 million in 2024 must file federal estate tax returns.

Aside from this federal estate tax, 12 states and the District of Columbia charge a state estate tax. The tax rate varies by state.

Each state also has a different exemption amount. This is the amount of estate funds exempt from estate taxes. If the value of your loved one’s estate does not exceed this amount, you will not need to file estate tax returns.

StateEstate Tax RatesEstate Tax ExemptionConnecticut10.8%-12%$9.1 millionDistrict of Columbia11.2%-16%$4 millionHawaii10%-20%$5.5 millionIllinois0.8%-16%$4 millionMaine0.8%-16%$5.8 millionMaryland0.8%-16%$5 millionMassachusetts0.8%-16%$1 millionMinnesota13%-16%$3 millionNew York3.06%-16%$6.1 millionOregon10%-16%$1 millionRhode Island0.8%-16%$1.7 millionWashington10%-20%$2.2 millionVermont16%$5 million

After taking out the designated estate tax, the remainder of the decedent’s estate would then be distributed according to the decedent’s wishes.

Which States Charge Inheritance Tax?

Inheritance tax is based on the state where the decedent lived or owned property, not where the beneficiaries live. Six states currently charge inheritance tax:

StateInheritance Tax RatesIowa0%-10%Kentucky0%-16%Maryland0%-10%Nebraska0%-18%New Jersey0%-16%Pennsylvania0%-15%

Note: Iowa plans to phase out the inheritance tax by 2025.

Inheritance tax does not apply to the decedent’s surviving spouse. In Iowa, New Jersey, Maryland, and Kentucky, surviving children and children do not need to pay inheritance tax, either.

The states that charge inheritance tax generally adjust the tax rate depending on the beneficiary’s relationship to the decedent. Non-relatives tend to pay a higher tax rate than immediate family members.

Examples of Estate Tax vs. Inheritance Tax

Consider the following examples if you are unsure whether you owe estate tax vs. inheritance tax on a loved one’s assets.

Suppose your loved one’s estate was worth $15 million:

• You would owe federal estate tax on the amount exceeding the exemption of $13.61 million. This means you would need to pay taxes out of the estate on $1.39 million.
• If the decedent lived in a state that charges estate tax, you would owe taxes on the amount exceeding the exemption. For example, if you live in Vermont, you would owe 16% in state estate tax on $10 million.
• If the decedent lived in a state that charges inheritance tax, each beneficiary would be responsible for filing taxes on their inherited amount, depending on their relationship to the decedent.

What Happens If You Fail To Pay Estate/Inheritance Tax?

If you are the executor of the decedent’s estate, you are responsible for paying the associated estate taxes out of their estate funds. Meanwhile, the beneficiaries are responsible for filing inheritance tax returns on their inherited funds.

Failing to pay estate or inheritance tax places you at risk of penalties from the IRS and state tax agencies. You may face fees, interest on your owed taxes, or even an audit.

Probate is a public proceeding, which means the government has access to information about the value of your loved one’s estate and who received an inheritance. If you’re unsure whether you owe taxes on the estate, it’s better to err on the side of caution and consult a CPA or tax attorney.

Is It Better To Disclaim an Inheritance?

Beneficiaries sometimes fear the estate and inheritance taxes they may have to pay on their inheritance. Some have chosen to disclaim their inheritance, which is a method of legally refusing to accept it. This way, they won’t owe any taxes.

This action typically arises from a misunderstanding about estate tax vs. inheritance tax. Many beneficiaries wrongfully believe they will owe estate tax on their inheritance. Instead, this tax comes out of the estate funds before inheritances are distributed.

The tax rate is negligible for the few states that charge inheritance tax. It is usually still worthwhile to accept your inheritance and pay the tax rate rather than sacrifice the inheritance altogether.

Apply for a Cash Advance on Your Inheritance With Rockpoint Probate Funding

Now that you know the difference between estate tax vs. inheritance tax, consider applying for financial relief through Rockpoint Probate Funding. We offer non-recourse advances on inheritances, helping you cover legal fees and other costs while awaiting your inheritance.

Contact us today to get a free evaluation.