Inheritance tax is a state-level tax that beneficiaries pay when they receive assets from an estate after somebody has passed away.
The inheritance tax is distinct from estate taxes, but planning tools for avoiding or minimizing it, such as lifetime gifting and placing assets in a trust, can be used for both types of so-called “death taxes.”
A personalized strategy for managing this potential tax should account for state laws about the types of property and beneficiaries that are subject to taxation of an inheritance.
There hasn’t been a federal inheritance tax since 1902. According to the Tax Foundation, the U.S. government levied an inheritance tax from 1862 to 1870 to finance the Civil War and from 1898 to 1902 to help pay for the Spanish-American War.
States began to impose an inheritance tax starting with New York in 1885. By 1916, 43 states had an inheritance tax. Only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have an inheritance tax in 2024, and Iowa’s is ending on January 1, 2025.
The Tax Foundation says that most states have phased out inheritance taxes because they are administratively burdensome, disincentivize business investment, and can drive high-net-worth individuals out of state.
Read more about Inheritance Tax vs. Estate Tax.