What You Need to Know
About Inheritance Tax

At some point, many of us face the emotional moment of losing a loved one. If you were particularly close to the person who has passed, you may find that they have left assets to you in their will. Yet before claiming a parent's house or cherished belongings, one more financial aspect requires attention: potential inheritance taxes on the acquired assets.

What is Inheritance Tax

How It Differs from Estate Tax

Inheritance taxes compel beneficiaries to pay taxes on inherited assets. This term is often confused with "estate tax," but the two are distinct kinds of death taxes.

Inheritance taxes compel beneficiaries to pay taxes on inherited assets. This term is often confused with "estate tax," but the two are distinct kinds of death taxes.

Inheritance tax is a tax on assets that are inherited from a deceased person. The tax is paid by the beneficiary of the inheritance, not the estate of the deceased. The beneficiary is the person who inherited ther wealth.

Whereas estate taxes are paid by the estate of the deceased person. Estate tax is calculated on the total value of the deceased person's assets, including cash, investments, real estate, and personal property.

Another significant difference: There is no federal inheritance tax, but there is a federal estate tax.

States That Impose Inheritance Tax

Inheritance tax is not levied by the federal government in the United States, but there are six states currently impose inheritance taxes:

  • Maryland
  • Nebraska
  • Kentucky
  • New Jersey
  • Pennsylvania
  • Iowa

Who Bears the Burden of Inheritance Tax?

The six states with inheritance taxes apply varying tax rates based on the heir's relationship to the deceased.

Spouses are typically exempt from inheritance taxes. Furthermore, children and grandchildren are also exempt in certain states. For example, in Pennsylvania, there is no inheritance tax on transfers to a surviving spouse or to a parent from a child aged 21 or younger.

Strategies for Minimizing Inheritance Tax


To mitigate inheritance tax, one approach is to receive portions of your inheritance as annual tax-free gifts - gifts don’t have to be cash — stocks, bonds, watches or other assets count, too.


Another alternative is for your relative to establish a trust, whether it’s a revocable trust, irrevocable trust, or grantor retained annuity trust (GRAT). Trusts help allocating assets for beneficiaries without worrying about inheritance taxes.

Life Insurance

Individuals can purchase life insurance to provide their beneficiaries with a financial benefit after their death. Life insurance proceeds are generally exempt from inheritance tax.

It is important to note that these are just some of the strategies that can be used to minimize inheritance tax liability. The best strategy for an individual will depend on their specific circumstances and estate planning goals. It is important to consult with a tax advisor to get personalized advice.

Ethical Considerations of Inheritance Tax Avoidance

While there are legal strategies to minimize inheritance taxes, some people question whether aggressively avoiding these taxes is ethical. Those who view inheritance taxes as promoting equality and funding important social programs argue that circumventing them excessively is unfair. Others see large inheritances as undermining meritocracy and equality of opportunity.

However, proponents of minimizing inheritance taxes assert individuals should have the right to pass on wealth to heirs and choose where to allocate assets. They contend tax avoidance techniques like trusts simply optimize finances within the law.

There are good-faith arguments on both sides. Each estate planning decision involves weighing legal strategies against personal values. Thoughtful discussions with family and advisors can help reach the approach that aligns best with one's principles.

How Inheritance Tax Rates are Calculated Based on the Heir's Relationship to the Deceased

The inheritance tax rates charged can vary significantly depending on the heir's relationship to the deceased. Generally, the closer the familial relationship, the lower the tax rate.

For example, in New Jersey, the inheritance tax rate for transfers to a spouse, domestic partner, child, or parent is 0%. For siblings, the inheritance tax rate is 15%. More distant relatives like cousins or nieces/nephews pay inheritance tax at a rate of 15% on the first $25,000 inherited and 16% on amounts above $25,000. Unrelated individuals inheriting assets would pay the highest inheritance tax rates.

Some states even exempt transfers to charities from inheritance taxes. So the tax rate calculation takes into account not just the dollar value being transferred, but also who precisely is receiving the inherited assets. Consulting an accountant or estate planning attorney can provide clarity on how inheritance tax rates apply to your specific situation.

Deferring or Reducing Inheritance Taxes

Some common strategies for deferring or reducing inheritance tax liability include:

  • Using a qualified terminable interest property (QTIP) trust, which allows the grantor to provide income to a surviving spouse while directing the remainder to other beneficiaries. This can help lower the overall tax burden.
  • Making annual exclusion gifts up to a certain amount per recipient ($16,000 federally in 2022) without incurring gift tax. Over time, this can transfer a significant portion of assets tax-free.
  • Paying tuition and medical expenses directly to providers - these transfers are also exempt from gift tax if made directly.
  • Using a grantor retained annuity trust (GRAT) to transfer assets expected to appreciate in value while retaining an annuity interest for the grantor.
  • Gifting or selling assets at less than fair market value, which reduces the taxable value.
  • Taking advantage of valuation discounts for assets like real estate or business interests.
  • Using an irrevocable life insurance trust (ILIT) to own a life insurance policy, keeping proceeds out of the taxable estate.

Consulting with an experienced estate planning attorney can help craft an optimal strategy to reduce tax liability when passing on assets.

Navigating Difficult Conversations with Grieving Family

Losing a loved one and dealing with financial matters simultaneously can be overwhelming. Here are some tips for sensitively discussing inheritance tax implications with grieving family members:

  • Set expectations upfront. Explain that reviewing finances is part of the estate settlement process and necessary to limit any tax burdens. Make clear your goal is protecting their interests.
  • Schedule a separate meeting specifically to discuss inheritance taxes. Don't force the conversation immediately after a loss. Allow some time for the initial grieving process.
  • Frame taxes as just one aspect of the overall estate plan. Emphasize the intention was to care for the family, even if taxes must be paid.
  • Listen compassionately if emotions arise. Do not criticize feelings or attempt to "fix" their grief. Simply let them express themselves in this difficult time.
  • Provide information simply and clearly. Avoid complex legal or financial jargon that could cause confusion. Fully explain inheritance tax responsibilities.
  • Be patient when family members need to process. Some may require multiple conversations over time to absorb guidance on taxes.
  • Offer to help complete inheritance tax forms and filings. This support can ease the burden during an already challenging time.

With empathy and open communication, families can work together to settle estate taxes while still honoring the loss of their loved one.

High-Profile Inheritance Tax Examples

When wealthy celebrities or public figures pass away, their heirs can face sizable inheritance tax bills. Here are some notable examples:

  • Michael Jackson's estate paid over $100 million in federal and state inheritance taxes after his death in 2009. His mother Katherine and three children were the primary beneficiaries.
  • Microsoft co-founder Paul Allen owed $500 million+ in estate taxes when he died in 2018 without a surviving spouse or children. Most of his $20 billion estate went to his philanthropic foundation.
  • Former first lady Jacqueline Kennedy Onassis left an estate of $200 million when she died in 1994. Her children Caroline and John F. Kennedy Jr. paid $15 million in New York state inheritance taxes.
  • Fashion designer Alexander McQueen's 2010 suicide shocked the world. His estate paid $12 million in inheritance taxes before the assets transferred to his relatives.
  • When Apple founder Steve Jobs passed away in 2011, his widow Laurene Powell Jobs inherited his fortune. She paid over $100 million in state inheritance taxes.
  • Legendary musician Prince died without a will in 2016. After legal battles, his six sibling heirs owed $45 million in estate taxes before receiving their inherited portions.
  • Billionaire businessman Sumner Redstone left most of his media empire to his daughter Shari when he died in 2020. She faced an estimated $750 million inheritance tax bill.


Dealing with financial matters like taxes can be especially challenging when you're also grappling with the loss of a loved one. That's why it's beneficial to consult professionals for estate planning if you or your relatives live in a state with inheritance taxes.

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