Inheritance Tax Thresholds by State

Managing the transfer of wealth is a critical part of financial planning, yet it is often complicated by a patchwork of state laws. While the federal government offers a generous exemption that protects most families, individual states are not always as forgiving. Understanding which states impose their own levies is essential for protecting your legacy.

The Distinction: Estate Tax vs. Inheritance Tax

Before looking at the specific states, you must distinguish between the two types of “death taxes” that exist in the United States. They are often used interchangeably in casual conversation, but they function very differently.

Estate Tax: This is a tax on the right to transfer property at death. The tax is calculated based on the total value of the estate before any assets are distributed to heirs. The estate pays the bill, not the beneficiaries.
Inheritance Tax: This is a tax on the privilege of receiving property. The beneficiary pays this tax, not the estate. The rate often depends on the relationship between the deceased and the heir.

Maryland is currently the only state in the union that imposes both an estate tax and an inheritance tax.

States That Impose Estate Taxes

As of 2024, twelve states and the District of Columbia collect an estate tax. The thresholds (exemptions) in these states are often much lower than the federal exemption of $13.61 million. If your estate exceeds these amounts, the state taxes the overage, usually at a top rate of 16% to 20%.

The One Million Dollar Thresholds

Massachusetts and Oregon have the lowest exemption thresholds in the country at just $1 million.

Massachusetts: If an estate is valued at over $1 million, the tax applies to the entire value of the estate, not just the amount over the threshold. This serves as a steep financial cliff for estates valued slightly over that mark.
Oregon: Oregon taxes the amount exceeding $1 million. The rates start at 10% and graduate up to 16%.

The “Cliff” States

New York is famous for its “cliff” rule. The exemption in New York is currently $6.94 million. However, if the estate’s value exceeds the exemption by more than 5%, the exemption is completely eliminated. The estate must pay taxes on the entire value from dollar one, not just the surplus.

Other Notable State Thresholds (2024 Estimates)

Washington State: $2.193 million. Washington does not allow portability, meaning a surviving spouse cannot use the unused portion of the deceased spouse’s exemption.
Rhode Island: Approximately $1.77 million.
Minnesota: $3 million.
Illinois: $4 million.
Vermont: $5 million.
Maine: $6.8 million.
Connecticut: This is the only state that matches the federal exemption level. For 2024, the threshold is $13.61 million. If you are under the federal limit, you are also under the Connecticut limit.

States That Impose Inheritance Taxes

Inheritance taxes are becoming less common. Iowa, for example, is currently phasing out its inheritance tax and will eliminate it completely for deaths occurring on or after January 1, 2025.

For the remaining states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania), the tax rate depends on who receives the money.

Spouses and Lineal Heirs

In almost all jurisdictions, transfers to a surviving spouse are 100% exempt from inheritance tax. Transfers to children and grandchildren are also frequently exempt or taxed at lower rates.

New Jersey: Spouses, children, grandchildren, and parents (Class A beneficiaries) are entirely exempt.
Kentucky: Similar to New Jersey, Class A beneficiaries (closest relatives) are exempt.
Pennsylvania: This state is stricter. While spouses are exempt, children and grandchildren pay a flat 4.5% tax on assets they inherit.

Collateral Heirs

If you leave money to siblings, nieces, nephews, or friends, the tax rates jump significantly.

Pennsylvania: Siblings pay 12%, and other heirs pay 15%.
Nebraska: Close relatives like siblings pay 1% (over a $40,000 exemption), but remote relatives and non-related heirs pay 13%.
Maryland: The tax is generally 10% for beneficiaries who are not exempt (such as nieces, nephews, and friends).

Strategies to Minimize Liability

If you live in a state with low thresholds, you have several options to restructure your wealth and reduce the burden on your heirs.

Aggressive Gifting

The easiest way to reduce an estate is to give the money away while you are alive. In 2024, the federal annual gift exclusion is $18,000 per recipient.

A married couple can give $36,000 to a child annually.
If that child is married, the couple can give $72,000 to the child and their spouse combined.
These gifts do not count against your lifetime exemption and remove the growth of those assets from your taxable estate.

Establish Irrevocable Life Insurance Trusts (ILIT)

Life insurance proceeds are generally tax-free to the beneficiary for income tax purposes, but the death benefit is included in your taxable estate for estate tax purposes. By placing the policy inside an ILIT, the death benefit is removed from your estate calculation. This can save a Massachusetts resident hundreds of thousands of dollars if the insurance payout would have pushed them over the $1 million threshold.

Credit Shelter Trusts (Bypass Trusts)

Many states do not offer “portability” of exemptions between spouses. If a husband in Washington State dies and leaves everything to his wife, the assets pass tax-free due to the marital deduction. However, his $2.193 million exemption is wasted. When the wife dies later, her estate only has her single $2.193 million exemption.

A Credit Shelter Trust allows the first spouse to leave assets up to the state exemption limit into a trust. The surviving spouse can access income from the trust, but the assets are technically not in her estate. This effectively doubles the family’s protected amount.

Change of Domicile

The most direct method is moving to a state without these taxes, such as Florida, Texas, or Arizona. However, this requires more than just buying a condo. To avoid a “domicile audit” from aggressive states like New York or California, you must prove you have truly relocated. This includes:

Spending at least 183 days a year in the new state.
Registering to vote and obtaining a driver’s license in the new state.
Moving primary banking and medical relationships to the new state.

Frequently Asked Questions

Does the federal estate tax apply to everyone?

No. The federal estate tax exemption for 2024 is $13.61 million per individual ($27.22 million for a married couple). This affects less than 1% of the population. However, the current law is set to “sunset” at the end of 2025, which could cut this exemption roughly in half if Congress does not act.

If I live in a tax-free state but own property in a taxable state, do I pay?

Yes. Real estate and tangible personal property are taxed based on where they are located. If you live in Florida but own a summer home in Maine valued at over $6.8 million (or included in an estate exceeding that total value), Maine will levy estate taxes on the value of that property.

Are 401(k)s and IRAs subject to estate taxes?

Yes. Retirement accounts are included in the gross value of your estate. Furthermore, heirs (other than spouses) generally have to drain these accounts within 10 years and pay income tax on the withdrawals, creating a potential double-taxation scenario.