What inheritance tax is and who pays it

Inheritance tax is a tax some states charge on money or property someone receives from a will or estate. It is different from the federal estate tax — most estates do not owe federal tax, but some states do charge inheritance tax on heirs. The person who inherits (not the estate itself) owes the tax in states that have it.

Not all states have inheritance tax. Currently, twelve states charge it: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and six others. If you live in a state without inheritance tax, your heirs will not owe this tax no matter what they receive. If you live in a state with it, the amount your heirs owe depends on how much they inherit and their relationship to you — spouses and children usually pay less or nothing, while distant relatives and non-relatives pay more.

The strategies that reduce inheritance tax work by moving money or property out of your taxable estate before you die, or by using tools that let you give money tax-free during your lifetime. Some of these are available to anyone; others depend on your state and how much you own.

Key Takeaways

  • Inheritance tax is charged by twelve states on what heirs receive, not by the federal government on most estates, so your state of residence determines whether your heirs owe it.
  • Spouses and children typically pay no inheritance tax or a lower rate than distant relatives and non-relatives do, so the tax burden depends on who inherits.
  • Giving money or property to heirs during your lifetime can reduce what is left in your taxable estate when you die, lowering the tax bill.
  • Trusts, life insurance, and retirement accounts can pass to heirs outside your taxable estate, meaning they avoid inheritance tax in most cases.
  • A tax professional in your state can tell you whether inheritance tax applies to your situation and which strategies make sense for your specific assets and family.

Give money during your lifetime

One of the simplest ways to reduce inheritance tax is to give money or property to your heirs while you are alive. The federal government allows you to give a certain amount per person per year without filing any paperwork or owing tax. This amount changes each year — in 2024 it was $18,000 per person, but you should check the current year's limit with a tax professional or the IRS website.

If you are married, you and your spouse can each give that amount to each heir in the same year, which doubles what you can transfer tax-free. For example, if you have three children and the annual limit is $18,000, you and your spouse could give $36,000 to each child per year without triggering any tax or paperwork.

Gifts larger than the annual limit do not automatically create a tax bill, but they do count against your lifetime exemption — a much larger amount you can give away over your entire life before federal gift tax applies. Because inheritance tax is separate from federal gift tax, you should ask a tax professional in your state whether large gifts affect your state inheritance tax as well.

Use a revocable living trust

A revocable living trust is a legal document that holds your assets and names someone (called a trustee, often yourself) to manage them. When you die, the trustee transfers the assets to your heirs without going through probate — the court process that normally handles wills. Because the assets pass outside probate, they may avoid inheritance tax in some states.

The key word is "may" — whether a trust avoids inheritance tax depends on your state's specific rules. Some states do not charge inheritance tax on assets in a trust; others do. You need to know your state's rule before you set one up. A trust also requires you to transfer ownership of your assets into it, which takes time and sometimes costs money to set up properly.

A revocable trust is different from an irrevocable trust. With a revocable trust, you can change or cancel it anytime and keep control of the assets. With an irrevocable trust, you give up control and cannot change it, but assets in an irrevocable trust are more likely to be outside your taxable estate. Irrevocable trusts are more powerful for tax reduction but also more restrictive, so they are not right for everyone.

Name beneficiaries on retirement accounts and life insurance

Money in retirement accounts like IRAs and 401(k)s, and the death benefit from a life insurance policy, pass directly to whoever you name as the beneficiary. They do not go through your will or your taxable estate, which means they usually avoid inheritance tax. This is one of the easiest and most effective ways to keep assets out of the inheritance tax system.

To use this strategy, you need to name a beneficiary on each account or policy. If you have not named one, the money goes to your estate instead, and then it becomes subject to inheritance tax. Check your beneficiary designations on file with your bank, insurance company, or retirement plan administrator — they may be outdated if you have moved, remarried, or had children since you opened the account.

Naming a beneficiary costs nothing and takes minutes. If you want to change who inherits, you can update the beneficiary form with your financial institution. This is one of the highest-impact, lowest-effort steps you can take.

Transfer property to a spouse

In most states with inheritance tax, spouses pay no tax on what they inherit from each other. This is called the marital deduction. If you are married and own property, real estate, or investments, leaving them to your spouse means your heirs will not owe inheritance tax on that portion of your estate.

The marital deduction is automatic — you do not have to do anything special to get it. You straightforward name your spouse as the beneficiary in your will, trust, or beneficiary designation. However, the tax bill does not disappear; it is delayed. When your spouse dies, their heirs will owe inheritance tax on everything your spouse inherited from you, unless your spouse also uses strategies to reduce the taxable estate.

If you have children and want to leave money to them as well as your spouse, you might use a trust that leaves assets to your spouse during their lifetime and then to your children after your spouse dies. This structure can reduce the total tax your family pays across two generations, but it requires careful planning with a lawyer or tax professional.

Pay off debts and funeral costs

Debts, funeral expenses, and estate administration costs reduce the size of your taxable estate. If you have significant debts — a mortgage, credit cards, medical bills — those amounts are subtracted from your estate before inheritance tax is calculated. Similarly, funeral costs and the cost of probate or trust administration come out of the estate first.

This is not a strategy you choose; it happens automatically. However, it means that if you are worried about inheritance tax, paying down large debts during your lifetime can reduce what is left for your heirs to inherit and what they will owe in tax. A mortgage paid off before you die reduces the taxable estate more than a mortgage that remains and is paid from the estate after you die.

Work with a tax professional in your state

Inheritance tax rules vary significantly by state, and some strategies work in one state but not another. A tax professional, estate attorney, or financial advisor in your state can tell you whether inheritance tax applies to your situation, estimate what your heirs might owe, and recommend which strategies make sense for your assets and family structure.

This is especially important if you own property in multiple states, have a large estate, or have a blended family. A professional can also help you set up trusts, update beneficiary designations, and make sure your will or trust is written in a way that minimizes tax in your specific state. The cost of professional information often saves your heirs far more in taxes than you spend on the consultation.

Frequently Asked Questions

Does the federal government charge inheritance tax?

No. The federal government charges an estate tax on very large estates (over $13.61 million in 2024), but that is paid by the estate, not by heirs. Inheritance tax is charged only by individual states, and only twelve states have it. If you live in a state without inheritance tax, your heirs will not owe this tax.

If I give money to my heirs now, will they owe inheritance tax on it later?

No. Money you give to someone during your lifetime is a gift, not an inheritance. Once they receive it, it belongs to them and is not subject to inheritance tax when you die. However, very large gifts may count against your federal lifetime exemption, though this rarely affects most people.

Do spouses have to pay inheritance tax?

In most states with inheritance tax, spouses pay no tax on what they inherit from each other. Children and more distant relatives usually pay tax, though the rate is often lower for children than for non-relatives. Check your state's specific rates and exemptions.

Can I avoid inheritance tax by moving to a different state?

Your state of residence at the time of death determines which inheritance tax rules explore. If you move to a state without inheritance tax before you die, your heirs will not owe inheritance tax. However, if you own property in a state with inheritance tax, that property may still be subject to that state's tax even if you live elsewhere.

What is the difference between a revocable and irrevocable trust?

A revocable trust lets you keep control and change it anytime, but assets in it may still be subject to inheritance tax. An irrevocable trust means you give up control, but assets in it are more likely to avoid inheritance tax. Irrevocable trusts are more powerful for tax reduction but less flexible, so the choice depends on your situation and state.