One of the biggest questions in the estate planning process is about how much tax beneficiaries will have to pay when they inherit. In general, most beneficiaries will not be subject to a large tax burden. There are federal and state level taxes, though not all states impose an estate or inheritance tax.
Federal Estate Tax
An Estate Tax is levied on the transfer of a person’s property after their death, which is why it is sometimes morbidly referred to as a “death tax.” Estate taxes are calculated based on the fair market value of the “gross estate,” meaning the total value of all assets at the time of death (as opposed to the original value). This tax comes out of the estate before any assets are distributed.
The majority of estates will not owe any federal estate tax because it only applies to estates exceeding a value threshold, known as the Basic Exclusion Amount. The current exemption at the federal level is $15 million per individual, or $30 million per married couple.
For estates that exceed that exemption, the federal tax rate is progressive, ranging from 18% to a maximum of 40%. Additionally, assets left to a surviving spouse are generally not taxed, regardless of their worth.
State Estate Tax
Some states do impose their own estate taxes, which typically have a much lower exemption threshold than the federal level. Thus, an estate could be exempt from the federal estate tax, but still be liable for the state-level estate tax.
Currently, 12 states (including New York, Massachusetts, and Washington) levy an estate tax. Colorado currently does not have an estate tax.
Inheritance Tax
Many people use inheritance tax and estate tax interchangeably, but they are in fact quite different. Whereas an estate tax is paid directly from the estate, the inheritance tax is paid by the beneficiary on the specific assets they receive. There is no federal inheritance tax, only state level.
Currently, only five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Iowa previously had an inheritance tax but phased it out in January 2025). There are some exemptions to the tax depending on the state.
Tax Planning Strategies
If inheritance or estate tax is a concern for your estate planning process, there are a couple of methods to help ease the potential tax burden for your beneficiaries.
- Annual Gifting: You can reduce the size of your taxable estate by making gifts while you are still alive. The current gift tax exclusion is $19,000 per individual ($38,000 for married couples) per person per year without it counting against your lifetime exemption (currently $15 million per person or $30 million for couples).
- ROTH IRAs: While traditional retirement accounts are subject to taxation, ROTH IRAs are typically tax-free. If your retirement accounts are primarily traditional IRAs, there are options for ROTH conversions that allow you to convert taxable retirement accounts into non-taxable accounts.
- Trusts: Certain types of irrevocable trusts can be used to shield assets from being included in the taxable estate.
Your best bet? Consult an estate planning attorney for the most beneficial strategy for your situation.
Wills & Wellness’ experienced attorneys are well-versed in the nuances of tax strategy as it relates to estate planning. We can help you create the best plan that serves your wishes while advantageously providing for your beneficiaries. We also offer a Client Membership program, which ensures that as your life and financial situation changes, so does your estate plan.