These two tax types are often confused — and the difference can cost beneficiaries. Understand which applies where, current thresholds, and how to plan around both.
Estate tax and inheritance tax are often used interchangeably, but they're different taxes paid by different parties on different bases. Understanding the distinction matters because it affects who owes what and when.
An estate tax is levied on the total value of a decedent's estate before it's distributed to beneficiaries. The federal estate tax applies to estates above the exemption threshold — $13.61 million per individual in 2024. The top federal estate tax rate is 40%. Because of the high exemption, fewer than 0.2% of estates owe federal estate tax.
Twelve states and the District of Columbia also impose state estate taxes, often with much lower exemptions. Massachusetts taxes estates over $2 million; Oregon taxes estates over $1 million. If the decedent lived in one of these states, the state estate tax can be significant even for estates that don't owe federal tax.
An inheritance tax is levied on what each beneficiary receives, not on the total estate value. The beneficiary (not the estate) owes the tax. Six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland imposes both estate and inheritance taxes.
Most inheritance tax regimes exempt spouses entirely, and many exempt children or other close relatives. The highest rates typically apply to more distant relatives and unrelated beneficiaries.
Maryland is the only state where both taxes apply. In all other states, it's one or the other (or neither). If you're administering an estate in a state with an estate tax, the tax is paid from estate funds before distributions. If you're administering in a state with an inheritance tax, the beneficiaries may owe tax on what they receive — though many executors gross up distributions or withhold a portion to cover the liability.
If the estate is large enough to be concerned about taxes, the planning happened (or should have happened) before death: annual gift exclusions, irrevocable trusts, charitable giving, life insurance trusts, and other strategies. As executor, your job is to understand what taxes apply, file the correct returns, and pay them on time. Federal estate tax returns are due nine months after the date of death, with a six-month extension available.
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