Two words in the English language have the power to make almost anyone cringe: “death” and “taxes.” Combine them, and they sound particularly ominous. Even worse, not everyone understands what death taxes are or whether they’re subject to them. It depends to some extent on where you live and the value of how much you own when you die.
Technically, there are two “death taxes”—estate tax and inheritance tax. Estate taxes can be imposed at both the federal level and at the state level, but only states impose an inheritance tax.
What Is an Estate Tax?
As the name implies, the estate tax is based on the value of your estate. It’s paid from the assets in your estate, after accounting for any deductions or credits. Your beneficiaries and heirs receive what's left. The IRS defines the estate tax as one that applies to “your right to transfer property at your death.”
The federal government collected an estate tax on estates valued at more than $11.7 million in 2021. For 2022, that exemption amount increased to $12.06 million. Only the value of an estate over that threshold is taxed. Depending on how much over that threshold your estate is, the tax rate ranges from 18% to 40%.
Twelve states and the District of Columbia also have an estate tax, some with significantly smaller exemptions. The IRS at least allows your estate to take a deduction for anything it must pay to your state. This reduces the value of your estate for federal tax purposes, potentially bringing it under the federal exemption amount.
What Is an Inheritance Tax?
Six states have an inheritance tax. This tax is levied against the beneficiaries of your inheritance. If you leave your best friend your vintage automobile, she’ll have to pay a percentage of its fair market value to the state if you—not she—live in a state that collects an inheritance tax.
Which States Have High Death Taxes?
Maryland’s Estate and Inheritance Taxes
Maryland imposes both an estate tax and an inheritance tax. The top estate tax rate is 16% and the exemption is $5 million. The state’s inheritance tax tops out at 10% for distant relatives and unrelated beneficiaries. Combine that with the estate tax, and a single bequest can be hit by a combined 26% in death taxes.
If your estate passes to your spouse, child, spouse of your child, parent, grandparent, stepchild or stepparent, or sibling, it is exempt from inheritance taxes. It is also exempt from inheritance taxes if it passes to a corporation that has only those relatives as stockholders.
Washington's Estate Tax
Washington doesn't have an inheritance tax, but it makes the list of costliest death taxes, because its top estate tax rate is 20%. The estate tax exemption there is $2.193 million in 2022. Even estates that are just over this threshold will have to pay at least a 10% rate. The rate increases with the value of the estate over this exemption amount.
Hawaii’s Estate Tax
Hawaii’s $5.49 million estate tax exemption is more generous than what’s available in Maryland or Washington, but still much lower than the federal exclusion. The tax rate ranges from 10% to 20%, increasing as the amount of your estate over the exemption limit increases. Hawaii doesn’t impose an inheritance tax.
Vermont’s Estate Tax
Vermont imposes a 16% estate tax rate on all estates valued over $5 million. This applies to the gross value of the estate, so it includes assets held in other states as well as those in Vermont. Vermont does not have an inheritance tax, though.
Minnesota’s Estate Tax
The estate tax rate in Minnesota also tops out at 16%, but its minimum rate of 13% is higher than every other state’s minimum. On top of that, Minnesota’s exemption of $3 million is lower than that of many other states with estate taxes.
Other States With Death Taxes
The following states implement estate or inheritance taxes at rates and exemption levels that aren't quite as high as the worst offenders:
- Oregon: 10% to 16%, $1 million exemption
- Massachusetts: 0.8% to 16%, $1 million exemption
- Rhode Island: 0.8% to 16%, $1.6 million exemption
- Illinois: 0.8% to 16%, $4 million exemption
- New York: 3.06% to 16%, $5.9 million exemption
- District of Columbia: 12% to 16%, $5.8 million exemption
- Connecticut: 10% to 12%, $5.1 million exemption
- Maine: 8% to 12%, $5.7 million exemption
- Iowa: 0% to 15%
- Kentucky: 0% to 16%
- Nebraska: 1% to 18%
- New Jersey: 0% to 16%
- Pennsylvania: 0% to 15%
Indiana used to have an inheritance tax, but it got rid of it in 2013. Tennessee repealed its estate tax in 2016, and Delaware did the same beginning in 2018.
Is It Time to Move?
You can mitigate death taxes with proper estate planning, such as transferring ownership of some or all of your property into an irrevocable trust. Property held in this type of trust isn’t technically yours any longer, so it doesn’t contribute to the value of your estate. Consult with an estate planning attorney to learn all the pros and cons of this solution.
Keep in mind that tax laws change periodically. You should always consult with a tax professional for the most up-to-date information in the state where you live.
Frequently Asked Questions (FAQs)
What is the difference between estate and inheritance taxes?
Estate taxes are paid by the estate of the deceased. Because they are calculated after any deductions or credits are taken out, the taxable value of the estate may be very different from the full value. Inheritance taxes are paid by the beneficiary on the full amount of their inheritance. This may be all or part of the total estate.
What is probate?
Probate is the process of "proving" and settling a will. It's done by the court system and includes establishing all of a person's assets, paying any remaining bills and taxes, and distributing their estate to any beneficiaries. How long probate takes depends on how complicated the estate is.