Estate Tax vs. Inheritance Tax: What's the Difference?

Understanding the Two Taxes

When someone passes away, their assets may be subject to transfer taxes before reaching the people they were meant for. The terms "estate tax" and "inheritance tax" are frequently used interchangeably, but they are distinct taxes with different rules, different payers, and different implications.

If you are an executor settling an estate or a beneficiary expecting an inheritance, understanding the difference can help you anticipate costs, plan distributions, and avoid surprises.

Estate Tax: Paid by the Estate

An estate tax is a tax on the total value of a deceased person's estate before anything is distributed to beneficiaries. Think of it as a tax on the right to transfer wealth at death.

Federal Estate Tax

The federal estate tax applies to estates exceeding the exemption threshold, which is $13.99 million per individual for 2026. This exemption is adjusted annually for inflation. Key details:

• Tax rates range from 18% to 40%, with the top rate applying to taxable amounts over $1 million above the exemption
• Portability allows a surviving spouse to inherit the unused portion of the deceased spouse's exemption, effectively doubling it to approximately $28 million for married couples
• The executor files IRS Form 706 (United States Estate Tax Return) if the gross estate exceeds the exemption threshold
• The tax is paid from estate assets before any distributions to beneficiaries

Because the exemption is so high, fewer than 0.1% of estates owe federal estate tax. However, executors of larger estates should be aware that filing deadlines are strict -- Form 706 is due nine months after the date of death, though a six-month extension is available.

State Estate Taxes

Several states impose their own estate taxes with significantly lower exemptions than the federal threshold. As of 2026, twelve states and the District of Columbia have a state-level estate tax:

• Connecticut -- $13.99 million exemption (matches federal)
• District of Columbia -- $4.71 million
• Hawaii -- $5.49 million
• Illinois -- $4 million
• Maine -- $6.8 million
• Maryland -- $5 million
• Massachusetts -- $2 million
• Minnesota -- $3 million
• New York -- $7.16 million
• Oregon -- $1 million
• Rhode Island -- $1.77 million
• Vermont -- $5 million
• Washington -- $2.193 million

State estate tax rates generally range from 10% to 20%. Note that Oregon and Massachusetts have particularly low exemptions, meaning more estates in those states face a tax liability.

Important: These exemptions change frequently. Always verify current thresholds with your state's tax authority or a qualified tax professional.

Inheritance Tax: Paid by the Beneficiary

An inheritance tax is a tax on the assets received by each individual beneficiary. Unlike estate tax, which looks at the total estate value, inheritance tax focuses on who gets what and their relationship to the deceased.

Which States Have an Inheritance Tax?

As of 2026, six states impose an inheritance tax:

• Iowa (being phased out, fully repealed by 2025 for deaths occurring on or after January 1, 2025)
• Kentucky
• Maryland (the only state with both estate tax and inheritance tax)
• Nebraska
• New Jersey
• Pennsylvania

How Inheritance Tax Rates Work

Inheritance tax rates depend on the beneficiary's relationship to the deceased. Closer relatives pay lower rates or are exempt entirely:

• Surviving spouses are exempt in all six states
• Children and direct descendants are exempt or pay very low rates (0% to 1%) in most states. Pennsylvania is the notable exception, taxing transfers to children at 4.5%.
• Siblings typically pay moderate rates (5% to 15%)
• Unrelated beneficiaries face the highest rates (10% to 18%)

For example, in Pennsylvania:

• Transfers to a surviving spouse: 0%
• Transfers to children: 4.5%
• Transfers to siblings: 12%
• Transfers to others: 15%

Each state also sets its own exemption thresholds for different beneficiary classes, so a small inheritance may be exempt regardless of the relationship.

Side-by-Side Comparison

Practical Implications for Executors

As an executor, understanding these taxes affects how you manage the estate:

Estate Tax Responsibilities

• Determine if the estate exceeds federal and state exemptions. You will need to value all estate assets, including real estate, investments, retirement accounts, life insurance proceeds, and other property. Our estate inventory checklist can help you get organized.
• File the appropriate returns. Federal Form 706 and any state estate tax returns are your responsibility as executor.
• Pay taxes before distributing assets. Estate tax must be paid from estate funds. Do not distribute all assets to beneficiaries before settling the tax obligation.
• Consider getting an EIN for the estate if one is needed for tax filings.

Inheritance Tax Responsibilities

• Notify beneficiaries. While beneficiaries are ultimately responsible for inheritance tax, as executor you should inform them of potential liabilities.
• Withhold or set aside funds. In some states, the executor may be required to withhold inheritance tax before distributing assets.
• File inheritance tax returns. In Pennsylvania, for instance, the executor -- not the beneficiary -- is responsible for filing the inheritance tax return (Form REV-1500).

Common Scenarios

Your loved one lived in a state with no estate or inheritance tax

If the estate is below the federal exemption ($13.99 million), there may be no transfer tax of any kind. The vast majority of estates fall into this category. Note that beneficiaries may still have income tax obligations on certain inherited assets like retirement accounts.

Your loved one lived in a state with an estate tax

The executor should determine whether the estate exceeds the state exemption. Even if the estate is well below the federal threshold, it could owe state estate tax. For example, an estate worth $3 million in Massachusetts (which has a $2 million exemption) would owe state estate tax even though it is far below the federal exemption.

A beneficiary lives in a state with an inheritance tax

The beneficiary's state of residence and their relationship to the deceased will determine whether they owe inheritance tax. Even if the deceased lived in a state with no transfer taxes, the beneficiary may owe tax in their own state. The rules vary -- consult your state's tax authority for specifics.

How to Minimize Transfer Tax Exposure

While tax planning is best done before death, executors and beneficiaries may still have options:

• Marital deduction: Assets left to a surviving spouse are generally exempt from both estate and inheritance tax
• Charitable deduction: Assets left to qualified charities reduce the taxable estate
• Disclaimer: A beneficiary can formally refuse (disclaim) an inheritance, which may redirect it to someone in a lower tax bracket
• Deductions and credits: Estate taxes allow deductions for debts, funeral expenses, and administrative costs. These can meaningfully reduce the taxable estate.

How SwiftProbate Can Help

Navigating estate and inheritance taxes can feel overwhelming, especially while grieving. SwiftProbate helps you organize your estate settlement tasks, understand what filing obligations apply to your situation, and keep track of deadlines -- so you can focus on what matters. Whether you are an executor managing a complex probate or a beneficiary trying to understand your tax obligations, having a clear roadmap makes the process more manageable.

This article is for informational purposes only and does not constitute tax or legal advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional or attorney for guidance specific to your situation.