Tax on Inheritance: What You Need to Know & How to Plan

09.05.2025 | Category: Build Your Financial Future

Expert Reviewer: Michelle Owens, JD, CLU, ChFC, CEBS
Manager Advanced Markets, Mutual of Omaha

Estimated Read Time: ~6 minutes

Summary: Inheritance and estate tax can chip away at what you leave to your loved ones after you pass, but smart planning can help you minimize this impact. This article looks at taxes on inheritance and estates, at both the state and federal levels, how they work, and what steps you can take now to reduce them.

When someone passes away and leaves behind assets—money, property, investments—those assets may be taxed before they ever reach the hands of the people they were meant for. At the federal level, there is currently no inheritance tax, but there are federal estate taxes. Some states impose estate or inheritance taxes—or both—so understanding the rules for each can help preserve more of your legacy.

What is the difference between estate tax and inheritance tax?

Let’s start by clearing up a common misunderstanding: inheritance tax and estate tax are not the same.

Estate tax is paid by the estate before any distributions are made and can be assessed at both the state and federal level.
Inheritance tax is paid by the person receiving the inheritance. Currently, there is no federal inheritance tax levied at the federal level, but it may in some states.

Estate Taxes

Currently, only individuals with estates valued over $13.99 million (or married couples with estates over $27.98 million) will owe a federal estate tax, while residents living in one of the 12 states listed below could also owe a state estate tax for estates with value as low as $1 million.

Connecticut
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington

Although these state-imposed estate taxes differ from state inheritance taxes, both can substantially affect the net amount received by heirs. If you live in one of these states, consider reaching out to a financial professional with experience in estate planning to help you understand and navigate the tax issues.

Inheritance Taxes

State-by-state breakdown: Who owes what?

Each state taxes inherited assets differently based on the size of the inheritance and the relationship between the heir and the deceased. Most exempt spouses and direct descendants, but more distant relatives or unrelated heirs may be subject to state inheritance tax rates.

Currently, five states impose a state-level inheritance tax, which is paid by the beneficiaries—not the estate. Here’s a closer look at how each state handles it:

Kentucky

Kentucky has three beneficiary classes.¹Spouses, parents, children, grandchildren, and siblings fall into Class A and are fully exempt from tax on inheritance. Class B heirs (nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, great-grandchildren) and Class C heirs (everyone else) face rates from 4% to 16% depending on the amount inherited. A small exemption is available for Class B, but Class C heirs get none. That means leaving money to a close friend could cause them to be liable for state tax, even if no federal tax applies.

Maryland

Maryland is unique because it levies both inheritance and estate tax.^{2 3}Inheritance tax here is 10%, but spouses, children, grandchildren, parents, siblings, and charitable organizations are exempt. That means bequests to anyone outside that circle—such as a cousin, unmarried partner, or friend—will incur the full 10% tax. If your estate exceeds Maryland’s estate tax exemption your heirs may get hit with both taxes, potentially cutting deeply into what you leave behind.⁴

Nebraska

Inheritance tax in Nebraska is currently assessed at three different rates⁵:

1% on inheritances to immediate relatives (children, parents, grandparents) over $100,000
11% for siblings, nieces, and nephews on amounts over $40,000
15% for unrelated heirs on amounts over $25,000

Note that surviving spouses, relatives younger than 22, and qualified charities are all exempt.

New Jersey

New Jersey eliminated its estate tax in 2018, but still imposes an inheritance tax.⁶ The tax rate ranges from 11% to 16% depending on the beneficiary’s class and the amount inherited. Immediate family members—spouses, children, grandchildren, parents—are exempt. But siblings, cousins, and in-laws may be liable if they inherit over $25,000 (up to that figure, they’re exempt).

Pennsylvania

In Pennsylvania, inheritance tax rates are 0% for spouses and children aged 21 or younger, 4.5% for adult children and grandchildren, 12% for siblings, and 15% for everyone else.⁷ Charitable organizations and certain government entities are exempt, regardless of the amount. However, there is no exemption threshold, so even small inheritances can be taxed if the beneficiary isn’t exempt.

How to minimize inheritance taxes and estate taxes with smart planning

If your estate seems large enough to trigger estate or inheritance taxes, early planning can greatly impact how much your heirs have to pay. Here are five strategies to minimize tax liability if you live in an affected state:

1. Use annual gifts to reduce your estate

You can give up to $19,000 per person per year (in 2025) without incurring gift tax or using your lifetime exemption.⁸ Regular gifting reduces the size of your estate, avoids triggering taxes for your loved ones, and allows them to benefit sooner.

2. Establish tax-efficient trusts

Trusts are a powerful way to reduce or eliminate estate and inheritance taxes. Types of trust include:

Irrevocable Life Insurance Trusts (ILITs) to keep insurance proceeds out of your taxable estate
Bypass trusts for married couples to fully use each spouse’s exemption
Charitable trusts to reduce taxable estate size while supporting causes you care about

Creating and maintaining a trust can be complex, so it’s wise to work with a financial professional who can explain and help you through the process.

3. Use life insurance strategically

Life insurance can be an efficient tool in estate planning, providing liquidity to cover potential estate taxes or to leave a tax-free asset. Consider working with your financial professional to explore options such as ILITs or other policies tailored to your goals.

4. Check and update your beneficiary designations

In the five states that impose an inheritance tax, who receives an asset can affect whether the asset is taxed, even if it doesn’t go through probate. Non-probate assets such as 401(k)s, IRAs, life insurance, and bank accounts, can be passed directly to beneficiaries without going through the probate process⁹, but if the recipient isn’t fully exempt, such as a sibling, niece, nephew or unrelated friend, they could still owe state inheritance tax.

Regularly reviewing beneficiary designations can not only help reduce the likelihood of state inheritance tax being owed, but can also keep assets out of probate. Assets that go through probate could be subject to creditors, delay distribution, increase costs and complexity and make settling the estate difficult for the executor.

A financial professional can help you keep your plan up to date, including making sure your beneficiary designations are current and consistent with your wishes.

5. Talk to a financial professional

The tax code is complicated, and the rules can change, so working with a professional can help you:

Structure your estate to minimize taxes
Navigate the laws in your state (and your heirs’ states)
Coordinate strategies across trusts, insurance, real estate, and retirement accounts

As well as a financial professional, it’s important to consult legal and tax professionals who can help with drafting and reviewing essential estate planning documents like wills, powers of attorney, living wills and trusts. Having these documents in order helps ensure your estate is handled smoothly.

It’s a key way to help ensure your family is cared for down the road.

The cost of not planning

If you avoid planning or assume it doesn’t apply to you, your heirs could face some costly consequences. Lacking a sound strategy, they risk unexpected tax bills, emergency asset sales, and property division disputes. Sometimes, delays and added expenses from probate can make things even more stressful.

The good news is that even simple planning, like making lifetime gifts or updating your beneficiary forms, can go a long way in avoiding these issues and easing the burden on your family.

Protect more of what you’ve built

Taxes on your estate aren’t just for the super-wealthy. They can take a substantial bite out of more modest estates, too.

Review your existing estate plan, check that your documents are up to date, and talk with a financial professional about ways to manage potential taxes. Whether it’s setting up a trust, making gifts, or simply understanding your state’s statutes, there are opportunities to preserve more for your loved ones.

At Mutual of Omaha, we’re here to help you protect your legacy with practical guidance, personalized support, and trusted resources for every stage of life.

Looking for advice on protecting your legacy?

Contact a financial professional

Frequently Asked Questions

How can you avoid capital gains tax on inherited property?

Some inherited property receives a “step up” in basis, meaning its tax basis resets to its fair market value at the time of inheritance. If you sell it soon after inheriting, say, at that same market value, there’s little or no capital gain to tax.

This stepped-up basis typically applies to assets like real estate or stock. But not everything qualifies; for example, inherited retirement accounts (such as IRAs and 401(k)s) and annuities do not, and withdrawals from these accounts will generally require the gain to be taxed as ordinary income.

Do I need to report an inheritance to the IRS?

Generally, you don’t report the inheritance itself as income, as there’s no federal tax on inheritance. However, any income the inherited assets generate must be reported on your tax return.

For example, if you inherit rental property and keep it as an investment property, you would report the rental income you receive each year on your annual tax return. But if you inherit a traditional IRA or other qualified tax-deferred retirement account, distributions you take from the account will be taxed as ordinary income, because of the pretax contributions that were originally made to the account.

Can I roll an inherited IRA into my own IRA?

A spouse beneficiary can roll over an inherited IRA into his or her own IRA. Most non-spouses must follow stricter withdrawal rules on inherited IRA, such as the 10-year payout under the SECURE Act^10.However, there are exceptions for certain “eligible designated beneficiaries” (such as minor children, disabled or chronically ill individuals, and beneficiaries not over 10 years younger than the decedent), who may stretch distributions over their lifetime using an inherited IRA.

Sources:

Kentucky Department of Revenue, Inheritance & Estate Tax, accessed June 2025
Maryland.gov, Inheritance Tax, accessed June 2025
Tax Foundation, Estate and Inheritance Taxes by State, 2024, November 2024
Comptroller of Maryland, What you need to know about Maryland’s estate tax , accessed June 2025
Nebraska Legislature, Nebraska Revised Statute 77-2004, accessed June 2025
NJ.gov, Inheritance Tax Rates, April 2025
Commonwealth of Pennsylvania, Inheritance Tax, accessed June 2025
IRS, FAQ: Gifts & Inheritances, January 2025
Investopedia, Do Retirement Accounts Go Through Probate? August 2024
IRS, Retirement topics – Beneficiary, May 2025

Expertly Reviewed by: Michelle Owens, JD, CLU^®, ChFC^®, CEBS

Manager Advanced Markets, Mutual of Omaha

With 30 years at Mutual of Omaha, Michelle focuses on training and case consultation with advisors on topics including premium finance, Social Security, retirement income, estate and business planning.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc. Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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