This article explains inheritance tax basics, including which states impose it, exemption rules for spouses, children, and relatives, and the varying tax rates. Understanding these details helps beneficiaries prepare for potential tax liabilities following inheritance. Learn how transfer taxes differ from estate taxes and the specific rules across different states to effectively manage inherited assets.

A Guide to Inheritance Tax: Essential Information for Beneficiaries

Are you aware that inheriting assets could trigger tax obligations? Known as inheritance, estate, or death taxes, these are collectively called transfer taxes. While similar, estate taxes depend on the total value of the entire estate, including gifts, whereas inheritance taxes are paid directly by the individual inheritors.

Typically, estate taxes are covered by the estate itself, but inheritance taxes are the responsibility of beneficiaries. Currently, only six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose inheritance taxes, with no federal level in place.

Mechanics of inheritance tax

Spouses and domestic partners usually qualify for exemptions in these states; New Jersey also exempts civil union partners.

Children and parents may benefit from exemptions depending on the state. For instance, Kentucky fully exempts children and parents, though other states may offer reduced rates or specific thresholds.

In New Jersey, siblings can inherit up to $25,000 tax-free, whereas unrelated individuals do not receive exemptions.

Important considerations include:

"Descendants" refers to children or grandchildren.

Lower inheritance tax rates are applied to close family members who are not exempted.

Higher rates apply to unrelated individuals, excluding charitable organizations.

States like Nebraska (1-18%), Kentucky (6-16%), and New Jersey (11-16%) have the highest rates.

Iowa offers no inheritance tax for estates under $25,000.

All six states exempt spouses from inheritance tax.

Nebraska and Pennsylvania do not offer exemptions for descendants.