There’s a lot to consider when planning your estate — beneficiaries, health care directives, keeping your will up-to-date, to name a few. But one thing that’s often missed is the impact that state estate and inheritance taxes can have on your financial legacy. In this article, we’ll go over some differences between estate and inheritance taxes, federal- and state-level taxes, as well as what your first step could be to potentially reduce your future tax burden.

What’s the difference between estate and inheritance taxes?

Simply put, estate taxes are levied against your estate. Inheritance taxes, on the other hand, are paid by your beneficiaries. So, if your state has both estate and inheritance taxes, your estate assets are taxed twice but in different ways.

When it comes to taxes, the federal government imposes an estate tax above a particular exemption, with some states imposing an estate tax as well. However, the federal government does not impose an inheritance tax, and it’s up to the states to determine whether to have an inheritance tax. 

Inheritance taxes are generally based on the relationship to the decedent. For example, spouses are usually exempt. In some cases, the deceased’s children are exempt. Usually, the more remote the recipient is to the deceased (i.e., grandchild, niece/nephew, cousin), the higher the inheritance tax rate.

What’s the difference between federal and state estate taxes?

Just like you may have federal and state income taxes (depending on your state), you can have federal and state estate taxes too. In 2024, the lifetime federal estate and gift tax exemption is $13.61 million, meaning you can transfer a combined $13.61 million during your life or upon your death before paying any federal estate tax. However, state estate tax exemptions are generally much lower, ranging from $1 million up to the federal exemption amount. So, even if you don’t have to pay a federal estate tax, you may still have to pay a state estate tax if you live in one of the 12 states (and the District of Columbia) that assesses estate tax. 

Which states have an estate tax, and which have an inheritance tax?

As of this publication, the states with an estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, the District of Columbia, Vermont and Washington. If you live in one of these states, check your state’s Department of Revenue or tax division for more details particular to your state.

In 2024, only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Starting in 2025, there will only be five states as Iowa has repealed its inheritance tax law. As a reminder, there is no federal inheritance tax. 

Ownership of property (such as a vacation home or other real estate) in another state might also subject you to that state’s estate or inheritance tax laws, so be sure to review the location of your assets with your estate-planning attorney.

What state estate and inheritance taxes mean for your estate strategy

Navigating the intricacies of estate and inheritance taxes can be stressful, especially considering that every state has different laws and regulations. If you’re interested in potentially reducing your future tax burden via strategic gifting or other tactics, talk to your financial advisor or estate-planning team to help you determine the best estate strategy for your unique situation. 

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.