← Guides

Inheritance Tax Guide

The federal estate tax exemption in 2025 is $13.99 million per individual ($27.98 million for married couples). Only estates above these thresholds pay federal estate tax, with a top rate of 40%. Several states also impose estate or inheritance taxes with much lower exemptions.

There's an important distinction between "estate tax" (taxed on the estate before distribution to heirs) and "inheritance tax" (taxed on the beneficiary receiving the assets). The federal government and most states impose an estate tax. Only six states impose an inheritance tax: Iowa (phasing out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In inheritance tax states, the rate depends on the beneficiary's relationship to the deceased — surviving spouses are exempt, while distant relatives may pay 15-18%.

For example, a single person dies in 2025 with a $20 million estate. After the $13.99 million exemption, $6.01 million is taxable at 40%, yielding a federal estate tax of approximately $2.4 million. If they live in Massachusetts (state estate tax exemption: $2 million), another estate tax is due at the state level. Proper planning with trusts, lifetime gifts, and charitable strategies could have dramatically reduced this burden.

The step-up in basis is one of the most valuable tax rules for inherited assets. When you inherit an asset, its cost basis is "stepped up" to its fair market value at the date of death (or six months after, if the executor elects). If your mother bought Apple stock at $10/share and it's worth $200/share when she dies, you inherit it with a $200 basis. If you sell immediately, you owe no capital gains tax on the $190 appreciation during her lifetime.

Estate Planning Strategies

Lifetime gifting using the annual exclusion ($18,000 per recipient in 2025, indexed for inflation), irrevocable life insurance trusts (ILITs) to remove insurance proceeds from the estate, charitable remainder trusts, qualified personal residence trusts (QPRTs), and portability of the deceased spouse's unused exemption (DSUE) are key strategies. The Tax Cuts and Jobs Act exemptions are set to sunset after 2025, potentially halving the exemption.

FAQs

Do I pay income tax on inherited IRA distributions?

Yes. Inherited traditional IRA distributions are taxed as ordinary income to the beneficiary. The SECURE Act requires most non-spouse beneficiaries to deplete the inherited IRA within 10 years. Roth IRA distributions are income-tax-free if the account was held for at least 5 years. Planning the timing of inherited IRA withdrawals to manage your tax brackets is crucial.

What is the "portability" of the estate tax exemption?

Portability allows a surviving spouse to use the deceased spouse's unused federal estate tax exemption. For example, if a husband dies in 2025 with a $10 million estate, he uses $10 million of his $13.99 million exemption. The remaining $3.99 million passes to the surviving spouse. Combined with her own $13.99 million exemption, she can shield $17.98 million. Without portability, the unused $3.99 million would be lost. An estate tax return (Form 706) must be filed to elect portability.

Which states have their own estate tax?

As of 2025: Connecticut ($13.99 million), District of Columbia ($4.3 million), Hawaii ($5.49 million), Illinois ($4 million), Maine ($6.41 million), Maryland ($5 million), Massachusetts ($2 million), Minnesota ($3 million), New York ($6.94 million), Oregon ($1 million), Rhode Island ($1.97 million), Vermont ($5 million), and Washington ($2.19 million).

Related Guides

Ecuador Property Tax Guide 2026 — Transfer Tax 5-7%, Annual 0.25-0.5%Ecuador property taxes for 2026. Transfer tax 5-7% of cadastral value, annual property tax 0.25-0.5% of cadastral value, and primary residence CGT exemption.Suriname Capital Gains Tax Guide: 0% CGT, No Separate Tax 2026Suriname capital gains tax — 0% separate CGT, gains treated as ordinary income for businesses, real estate and securities treatment, and tax implications for 2026.Kuwait Tax Filing Guide — Corporate Returns, KFAS/NLST, Transfer Pricing 2026tax filing in Kuwait for 2026 — no individual tax filing, corporate tax filing within 6 months of fiscal year end, corporate return filed with Ministry of Finance (Tax Department), KFAS/NLST separate Lebanon Crypto Tax Guide 2026 — 17% CIT or IIT RatesLebanon cryptocurrency taxation: crypto treated as income or capital gain, taxed at 17% CIT (business) or IIT 2-25% (individual), no specific crypto legislation.Mali Property Tax Guide 2026 — Registration 5% on Transfers, No Annual Wealth TaxMalian property tax. Registration duty 5% on property transfers, no annual wealth tax, no annual property tax, and compliance requirements for 2026.Kiribati Corporate Tax Guide: CIT 25% Standard Rate 2026Kiribati Corporate Income Tax — 25% standard rate, no reduced rates for small businesses, taxable income calculation, and compliance for 2026.
Browse all guides →