Estate taxes aren’t often at the forefront of anyone’s mind, but they can become a big deal if a loved one leaves behind substantial wealth. The federal government taxes estates that go above a certain threshold—currently $13.61 million for 2024—while some states also impose their own levies, sometimes at significantly lower cutoffs. If a relative’s estate value exceeds these limits, you may discover there’s a sizeable tax bill attached before you see your portion of the inheritance. In this guide, you’ll learn the basics of the estate tax, which states still have them, and how they differ from inheritance taxes.
Defining Estate Taxes
An estate tax is essentially a charge on the net worth of a deceased person’s estate. When someone dies, the total value of their assets—from real estate and bank accounts to artwork and investments—gets tallied up. If that figure surpasses a set amount, taxes kick in. The key point is that the estate itself pays this tax before assets are distributed to heirs. Only after the IRS (and possibly state tax agencies) takes their share does the family receive whatever remains.
In 2024, any estate valued over $13.61 million is subject to the federal estate tax, which climbs in percentage with the estate’s size. Though this won’t affect the majority of families, it can be a real concern for individuals whose loved ones owned large property portfolios, sizable investment accounts, or successful businesses.
States That Impose Estate Taxes
Though most states no longer have estate taxes, there are around a dozen that do. Each sets its own threshold and tax rate, which may be lower or higher than the federal threshold. Even a few states begin taxation at just $1 million for estate values, meaning you could face a tax even if the estate in question isn’t huge by federal standards.
Here’s the list of states currently levying these taxes:
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Maryland
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
In addition to these, Washington, D.C. also places a tax on estates above a certain level.
One interesting note is that Maryland stands out as the only state that subjects residents to both estate taxes and inheritance taxes (which are two distinct kinds of charges).
Estate Tax vs. Inheritance Tax
People often mix up these two terms because they’re both “death taxes.” But they’re not the same. An estate tax is pulled from the overall estate value—so the estate itself foots the bill before handing out money to heirs. On the other hand, an inheritance tax is charged to the beneficiary who’s receiving assets. Someone who wants to skip paying an inheritance tax might turn down the inheritance altogether, which would be an unusual move but can happen in certain cases.
From a federal standpoint, there is no inheritance tax—only the estate tax. If inheritance taxes apply, it’s strictly at the state level, currently in Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Possible Strategies to Avoid or Lessen Estate Taxes
Eliminating this tax entirely can be tough if the estate goes beyond the thresholds. Yet, there are a few common tactics people use to reduce or bypass it:
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Marital Deduction
If everything is left to a surviving spouse, estate taxes often don’t apply immediately. U.S. tax law generally permits an unlimited transfer of property between spouses, so the entire estate may transfer tax-free to the spouse. Later, once the surviving spouse passes, the estate could owe taxes if it still exceeds federal or state limits.
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Living Trusts
Assets placed in a living trust might dodge the need for formal probate in many states, although they aren’t always exempt from estate taxes. Some high-net-worth individuals use particular trust vehicles that can shift ownership or growth of assets in ways that reduce overall taxes. For instance, an irrevocable trust set up with detailed legal language can remove certain assets from the taxable estate.
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Gifting During Life
Another angle involves giving away parts of the estate while someone is alive, taking advantage of annual gift tax exclusions or lifetime gift tax exemptions. If done carefully, these gifts can shrink the estate’s size so that what remains falls below the taxable threshold.
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Irrevocable Trusts (IDGTs)
Some wealthy families opt for something like an intentionally defective grantor trust (IDGT). The word “defective” is misleading—it’s actually a trust structured in such a way that assets can grow outside the estate’s taxable pool. However, setting up IDGTs requires specialized estate planning guidance to ensure compliance with complex laws.
None of these paths remove the estate tax entirely for everyone, but they can help minimize what’s owed. Timing and the right legal setup are critical, so it’s advisable for people who suspect their estate might be hit by taxes to consult estate planning professionals well in advance.
States That Used to Have Estate Taxes
A handful of places once levied estate taxes but have since rolled them back. New Jersey is a prime example: it ended its estate tax in 2018. This can create confusion, because people remember older laws and might think they’re still in effect. Always verify the current state rules if you’re unsure. Tax laws change, and an outdated assumption could lead to unpleasant surprises.
Handling Estate Taxes in the Probate Process
Estate taxes typically come into play during probate. If the total assets meet or exceed federal or state limits, the executor of the estate has to calculate and pay taxes on the estate’s behalf before distributing inheritances to beneficiaries. That’s why some heirs find themselves waiting longer than expected—especially if the process involves large properties or complex valuations.
It can be even more challenging if you’re juggling other probate hurdles, like creditor claims or family disputes over who inherits which asset. In such scenarios, the estate might stay stuck in court for a while, leading to delays in actually receiving funds.
How a Probate Cash Advance Could Help
Waiting for all this to resolve can strain a family’s finances, particularly when funeral costs, medical bills, or day-to-day expenses pile up. While it doesn’t reduce or eliminate estate taxes directly, a probate cash advance might provide immediate liquidity for those who qualify. One can apply to a company like Rockpoint Probate Funding, which can front a portion of the expected inheritance. Then, once the court releases the estate assets, the lender retrieves its share from that distribution.
Not every state or scenario is eligible for such funding, though. Also keep in mind that using an advance doesn’t free anyone from owing estate taxes—it just gives beneficiaries quicker access to funds they might need in the present.
Next Steps for Concerned Families
If a loved one recently passed and left behind an estate that looks sizable—close to or beyond the federal threshold of $13.61 million, or above a state limit where estate taxes apply—it may be wise to consult a tax advisor or an attorney specializing in estate law. They can estimate the tax burden, guide the executor through required paperwork, and help figure out if any planning strategies could have been put in place earlier to reduce the bill.
For heirs coping with cash shortages while the estate’s tax status is sorted out, exploring a probate advance could be one way to cover urgent expenses until distribution finally happens. It’s not a fix for the estate tax itself, but it might help keep everything afloat during a lengthy legal procedure.
Closing Thoughts
Estate taxes don’t affect most families, but they pack a punch for estates that exceed federal or state thresholds. Knowing which laws apply in your state—and distinguishing estate taxes from inheritance taxes—can head off confusion. It also pays to consider proactive estate planning, like setting up trusts or gifting assets, to reduce the tax bite for future generations. Meanwhile, if you’re already caught in a long probate and worried about money in the short term, looking into a probate cash advance might give you some financial room to breathe.
