California considers temporary tax on the state’s wealthy
The California Billionaire Tax Act proposes a one-time tax on the state’s wealthiest residents to increase revenue for services such as health care.
Uncle Sam escorts your heirs to the IRS while the Grim Reaper guides you into the afterlife.
Death can be a tax trigger, and two in particular need to be noted: inheritance tax and inheritance tax. Many people think they are the same, but they are not.
Inheritance tax is levied on things the deceased owned or had certain interests in at the time of death, and is paid by the estate. Inheritance tax is paid by the heir.
The federal government only sets inheritance taxes, and the threshold is high, so most people don’t have to worry too much. However, some states have different standards and rules for one or both, or none at all, which makes death taxes even more confusing.
Here’s what you need to know to start planning. It will save your loved ones from grief as well as confusion and protect their legacy.
What is the difference between inheritance tax and inheritance tax?
◾ The IRS says estate tax is “a tax on the right to transfer property at death.” These are paid by the estate of a person who dies before the assets are distributed.
◾ Inheritance tax is levied on those who inherit money, property, and other assets. This only applies if the person who died and inherited the property lived in a state with an estate tax. It does not depend on the domicile of the beneficiary.
Who pays inheritance tax?
The federal government imposes this tax, but 12 states and the District of Columbia also impose it.
The federal tax rate ranges from 18% to 40%, depending on the amount above the threshold or exemption amount of $13.99 million per person in 2025 or $15 million in 2026. For each tax tier, you pay a basic tax amount and an additional marginal tax rate.
Because of the high threshold, most people probably won’t have to pay these taxes. For example, just 9,024 federal estate tax returns were filed in 2023, according to IRS data. Only about 40% of this was subject to tax, but the revenue generated was $44.4 billion.
However, state inheritance taxes may be a different story. Sam Tutko, a vice president at Miser Wealth Partners, said exemption levels and top tax rates are typically much lower and easier to apply than the federal government.
The 12 states and the District of Columbia that impose inheritance taxes are:
Who pays inheritance tax?
Only five states impose an inheritance tax.
Tax rates vary by state, but can range from less than 1% up to 16%. Fees vary depending on the size of the estate, state tax laws, and your relationship to the deceased.
Generally, the closer you are to the deceased, the more likely you are to avoid having to pay this tax. Spouses are always exempt from paying inheritance tax, and close relatives such as children and parents are also often exempt from inheritance tax or at a lower rate.
In 2025, the following states introduced inheritance taxes:
◾ Kentucky
◾ Maryland
◾ Nebraska
◾ New Jersey
◾ Pennsylvania
Why should you look at Maryland?
Maryland is the only state that imposes both an estate tax and an inheritance tax.
How can I avoid these taxes?
The best way to avoid inheritance tax is to manage your assets during your lifetime. To reduce or limit the amount of inheritance tax your beneficiaries may have to pay, consider the following:
◾ Transfer a portion of your assets to potential beneficiaries during your lifetime. You can gift a certain amount tax-free to each person each year. In 2025 and 2026, the annual gift exclusion amount will be $19,000. These gifts are separate and in addition to the $13.99 million lifetime estate tax exemption in 2025 ($15 million in 2026).
◾ Moving to a state with no estate or inheritance tax. However, even if your estate exceeds the exemption threshold, federal estate tax may still apply.
◾ Set up an irrevocable trust. You relinquish some control over the asset because the trust becomes the official owner and cannot be changed or canceled. However, since the trust assets are not transferred upon death, no inheritance or inheritance tax is payable. “Assets that are likely to appreciate in value are particularly good candidates for trusts,” said Scott Goldberger, principal in real estate and trusts at accounting firm Kaufman Rossin.
What should I do if I cannot avoid inheritance tax?
Dimitri Pan, a wealth advisor at financial services firm Charles Schwab, said if for some reason inheritance tax cannot be avoided, but heirs lack the cash to pay (claims are usually paid within a few months), they should consider taking out a small term life insurance policy with a death benefit that can cover the estate tax.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
