Not every state imposes "death taxes"—estate and/or inheritance taxes—but some do. Of those states, a few have high tax rates that you may need to be aware of. Maryland is the only state that imposes both estate and inheritance taxes, while Hawaii, Washington, Vermont, and Minnesota have been known for their high tax rates when it comes to death taxes.
It's important to understand what death taxes are or whether you're subject to them. It depends to some extent on where you live and the value of how much you own when you die.
Key Takeaways
- Estate taxes can be imposed at both the federal and state level, but only states impose an inheritance tax.
- Maryland is the only state that taxes residents on both their estate and inheritance.
- Washington, Hawaii, Vermont, and Minnesota also have high tax rates for death taxes.
- Just as with the federal estate tax exemption, states also have thresholds, and if your estate is less than the amount, you may not have to pay estate taxes.
- New Jersey and Kentucky have the highest inheritance tax rates in the U.S.
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 collects the estate tax on estates valued at more than a certain amount each tax year. For tax year 2022, that amount is $12.06 million. For tax year 2023, that amount is $12.92 million. Only the value of an estate over that threshold is taxed. Depending on the value of your estate that is over that threshold, the tax rate ranges from 18% to 40%.
Twelve states and Washington, D.C. impose estate taxes at the state or local level. 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, but not every state may tax the beneficiaries the same. For example, if you live in Kentucky and leave money to your child, they do not need to pay an inheritance tax on it. If you leave your best friend money, they'll have to pay an inheritance tax on it. Kentucky is just one example of a state that has different classes of beneficiaries who are taxed differently.
Which States Have High Estate or Inheritance Taxes?
Maryland: 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.
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.
Note
Maryland is the only state that has both an estate and inheritance tax. All other states have just one or the other.
Washington: Estate Taxes
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 for tax year 2022 is $2.19 million. Estates that are just over this threshold will have to pay at least 10%. The rate increases with the value of the estate over this exemption amount. The top 20% tax rate applies to estates valued at $9 million or more.
Hawaii: Estate Tax
Hawaii has an estate tax exemption threshold of $5.49 million, and its estate tax rate ranges from 10% to 20%, increasing as the estate amount increases over that amount. Hawaii doesn’t impose an inheritance tax.
Vermont: Estate Tax
Vermont imposes a 16% estate tax rate on all estates valued at 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: 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 those listed above.
States With an Estate Tax and Their Rates
- 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%, $6.1 million exemption
- Washington D.C.: 11.2% to 16%, $4.25 million exemption
- Connecticut: 11.6% to 12%, $9.1 million exemption
- Maine: 8% to 12%, $6.01 million exemption
States With an Inheritance Tax and Their Rates
Not all people will need to pay an inheritance tax. It will depend on the relationship with the decedent. Oftentimes, a spouse or child will not have to pay (meaning their tax rate is 0%), while friends or distant relatives will (likely included in the tax rate ranges below).
- Iowa: 3% to 9% for 2022, 2% to 6% for tax year 2023, 0% to 3% for tax year 2024, no inheritance tax in tax year 2025 and thereafter
- Kentucky: 4% to 16%
- Nebraska: 1% to 18% for tax year 2022, 1% to 15% for tax year 2023
- New Jersey: 11% to 16%
- Pennsylvania: 4.5% to 15%
Note
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.
Should You Move To Avoid Death Taxes?
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.
Also, before you pick up and move to a different state without any death taxes, 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.
