Estate Tax vs Inheritance Tax: Smart Planning Made Simple
Estate tax vs inheritance tax — these two terms often get confused, but they represent very different concepts when it comes to transferring wealth after death. While both involve taxes on assets, they differ in who pays them, how they’re calculated, and where they apply.
Understanding the difference — especially under federal and state law — can help you make smarter estate planning decisions and avoid surprises for your heirs. Knowing how estate tax vs inheritance tax works helps you better protect your legacy.
Estate Tax vs Inheritance Tax: How They Compare
One of the most important aspects of understanding estate tax vs inheritance tax is knowing who is responsible for paying each. The estate tax is levied on the deceased’s total assets before distribution, while the inheritance tax is charged to the individual receiving the inheritance, depending on their relationship and state laws.
Another critical difference in estate tax vs inheritance tax is when they are applied. Estate tax is handled during the probate and settlement of the estate, while inheritance tax may be applied after assets are distributed to beneficiaries.
What Is an Estate Tax?
An estate tax is a tax on the total value of a deceased person’s estate before it is distributed to heirs.
Key Characteristics:
- Paid by the estate (not the heirs)
- Based on the total value of assets owned by the decedent at death
- Applies before distributions are made to beneficiaries
Federal Estate Tax:
As of 2025, the federal estate tax exemption is $13.61 million per person, or $27.22 million for married couples. If the estate is below that threshold, no federal estate tax is owed. If it exceeds the exemption, it is taxed at rates up to 40% on the amount over the threshold.
State Estate Tax:
Not all states impose an estate tax. Those that do have separate exemptions and rates, often much lower than the federal threshold.
Examples:
- Oregon: Exemption is $1 million; rates up to 16%
- Massachusetts: Exemption is $2 million; rates up to 16%
- Washington: Exemption is ~$2.2 million; rates up to 20%
Arizona does not impose a state-level estate tax.
What Is an Inheritance Tax?
An inheritance tax is a tax on the individual who receives an inheritance, based on the value of what they receive.
Key Characteristics:
- Paid by the beneficiary, not the estate
- Calculated individually for each heir
- Often depends on relationship to the decedent — spouses and children may pay little or nothing, while distant relatives may owe more
States That Have an Inheritance Tax (2025):
As of 2025, only six states impose an inheritance tax:
- Iowa (phasing out by 2025)
- Kentucky
- Maryland (has both estate and inheritance taxes)
- Nebraska
- New Jersey
- Pennsylvania
Inheritance tax rates vary and can range from 1% to 18%, depending on the amount and the recipient’s relationship to the deceased.
There is no federal inheritance tax. Arizona does not impose an inheritance tax either.
Planning Ahead
For most people, estate tax vs inheritance tax concerns are minimal — especially while the current federal exemption is high. TrustHandled’s estate plan documents are tailored for individuals who do not have these concerns. Most married couples don’t have $27 million dollars to worry about.
However, as laws evolve, it’s wise to stay informed and review your estate plan regularly. TrustHandled’s digital vault subscription keeps users updated with legal changes and reminders to review documents.
When weighing estate tax vs inheritance tax issues, don’t assume one applies more than the other — both can impact your beneficiaries depending on your state and assets.
It’s also smart to include estate tax vs inheritance tax planning in discussions with your attorney or financial advisor. They can help craft a strategy that reduces exposure to both kinds of taxes, depending on your situation.
If you’re concerned about estate taxes or inheritance taxes:
- Work with an estate planning professional to structure your estate efficiently
- Consider lifetime gifts, trusts, and other strategies to reduce taxable exposure
- Review your state’s laws to determine whether local taxes apply to your estate or beneficiaries
Final Thoughts
Understanding estate tax vs inheritance tax helps you make smarter, more confident decisions. Whether you’re planning for your own estate or supporting a loved one, clarity today prevents confusion and cost tomorrow.
TrustHandled makes it easy to organize your plan, keep it current, and ensure the right people have access when it matters most.
