What Is Inheritance Tax and Who Has to Pay It

Most people have never heard of inheritance tax until it is too late. Your loved ones could owe money to the state simply for receiving what you left behind. Here is what every family needs to know.

Inheritance tax is a tax that certain states charge to individuals who receive assets from a deceased person's estate. Unlike estate tax, which is paid by the estate itself before distribution, inheritance tax is paid directly by the beneficiary after they receive their share. The distinction matters because it changes who is responsible for writing the check to the government.

Not every state collects inheritance tax, and not every beneficiary owes it. Several factors determine whether a tax bill arrives, including where the deceased lived, who received the assets, and how much was passed down. Understanding these five key points will help you plan smarter and protect the people you love.

1. Inheritance Tax vs. Estate Tax: Understanding the Key Difference

Many people confuse inheritance tax with estate tax, but the two are completely separate obligations. Estate tax is levied on the total value of a deceased person's estate before assets are distributed to anyone. Inheritance tax is charged to the individual beneficiary after they receive their portion. In some cases, a person's estate could owe estate tax first, and then the beneficiaries could owe inheritance tax on top of that, depending on the state. Knowing which tax applies to your situation is the first and most important step in protecting your family.

2. Which States Actually Collect Inheritance Tax

As of 2024, only six states impose an inheritance tax. Those states are:

• Iowa (being phased out through 2025)
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

3. Who Is Exempt From Paying Inheritance Tax

Most states that collect inheritance tax provide significant exemptions based on the relationship between the deceased and the beneficiary. Surviving spouses are almost always fully exempt from paying inheritance tax in every state that imposes it. Direct descendants such as children and grandchildren are exempt in several states as well. More distant relatives like aunts, uncles, and cousins, along with unrelated beneficiaries, tend to face the highest tax rates. This means a will that clearly identifies your beneficiaries and their relationship to you can directly and meaningfully impact how much tax your loved ones are forced to pay.

4. How Much Inheritance Tax Can Actually Cost Your Heirs

Inheritance tax rates vary widely depending on the state and the relationship of the beneficiary to the deceased. Rates typically range from 1 percent up to 18 percent of the inherited amount. Nebraska charges up to 15 percent for remote relatives and non-family beneficiaries. Pennsylvania also charges up to 15 percent for non-family heirs. On a $200,000 inheritance, that could mean a $30,000 tax bill for a beneficiary who has no close family connection to the deceased. Planning ahead with a clear legal document can reduce or even eliminate this burden entirely.

5. How a Proper Will Helps Minimize Inheritance Tax Exposure

A well-drafted will gives you the power to direct assets strategically toward exempt beneficiaries first. Leaving more assets to a surviving spouse or direct children, for instance, can significantly reduce the overall tax burden placed on your estate. Your will can also include language specifying how any taxes should be paid, so that one beneficiary does not carry a disproportionate share of the bill. Without a will, state intestacy laws decide who receives your assets, often without any consideration for tax efficiency. Taking the time to create a clear, legally valid will is one of the most impactful financial decisions you can make for your family.

The Big Question: Should You Plan Your Estate With Inheritance Tax in Mind?

The answer is yes, and the good news is that you do not need to spend thousands of dollars at an attorney's office to do it. A properly written will that names your beneficiaries clearly, specifies your wishes, and accounts for state-specific rules can dramatically reduce the tax stress your loved ones face. Most families living outside the six inheritance-tax states have nothing to fear from this particular tax, but every family still needs a valid will to avoid probate delays, family disputes, and confusion over who gets what. A DIY will template from BudgetWills.com gives you a legally valid, state-specific document at a fraction of what a private attorney would charge.

BudgetWills.com makes it simple to create a legally valid, state-specific will for just $49.95. You can complete your will from home in minutes, download it instantly, and have peace of mind knowing your wishes are protected. Visit BudgetWills.com today, choose your state, and take the most important step your family deserves.