Inheritance Tax Definition

When someone close to you passes away and leaves you money, property, or other assets, you might wonder whether you’ll owe taxes on what you receive. The answer depends largely on where you live and your relationship to the deceased. This is where inheritance tax enters the picture—a tax that can catch many beneficiaries off guard if they don’t understand how it works.

This guide breaks down everything you need to know about inheritance tax, from its basic definition to how it varies by state and country, how it differs from estate tax, and what planning strategies might help reduce your liability.

Quick answer: what is inheritance tax?

Inheritance tax is a tax paid by the person who receives money, property, or other assets after someone dies. Unlike estate tax, which is levied on the total value of a deceased person’s estate before distribution, inheritance tax is imposed directly on the beneficiary based on what they personally inherit.

As of 2025, inheritance tax exists only at the state level in the United States—not all states impose it. In fact, only five states currently have an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa fully repealed its inheritance tax for deaths occurring on or after January 1, 2025, leaving this small group of states as the only ones where heirs might face this particular tax. Inheritance tax is a state tax, not a federal tax, and generally applies to residents of those states or to property located within those states.

Here’s a quick summary of the essentials:

• Who pays: The beneficiary who receives inherited assets, not the estate itself; typically, this tax is imposed on residents of the state or on property located within the state

• When it applies: Upon the decedent’s death, when assets are transferred to heirs

• Rate and exemptions: Vary based on local law and the heir’s familial relationship to the deceased

• Key distinction: Different from estate tax, which is paid by the estate before distribution

The difference between inheritance tax and estate tax is a common source of confusion, and we’ll explore that comparison in detail later in this article.

Inheritance tax definition and key concepts

Let’s expand on the quick answer with a more formal definition. Inheritance tax is a levy imposed on individuals who inherit assets from a deceased person, calculated on the taxable value of what they personally receive. The tax base is typically the fair market value of assets received at the date of death (or an alternate valuation date where permitted), minus any applicable exemptions or allowances. In many states, there is an exemption for inheritances below a certain threshold, meaning only amounts above this limit are subject to inheritance tax, and the specific threshold can vary depending on state laws and the relationship to the deceased.

Several related terms often appear in discussions about death and taxes, and it helps to understand the distinctions:

• Inheritance tax: A tax on the beneficiary based on what they receive

• Succession tax: Often used interchangeably with inheritance tax in many jurisdictions

• Death duties: A general term for taxes triggered by death, which can include both estate and inheritance taxes

• Estate tax: A tax on the total estate before distribution (not on individual heirs)

Some countries use the term “inheritance tax” even when their system technically taxes the estate rather than individual recipients. The UK, for example, calls its system “inheritance tax,” though the tax is legally assessed on the estate’s value before distribution.

What assets are typically subject to inheritance tax?

Inheritance taxes generally apply to most forms of property transferred at death:

• Cash and bank accounts

• Securities, stocks, and bonds

• Real estate and land

• Business interests and ownership stakes

• Tangible personal property such as art, jewelry, vehicles, and collectibles

However, life insurance proceeds and pension benefits may receive different treatment depending on the jurisdiction, often passing tax-free if structured properly.

The tax rate and whether any tax is actually due often depend on two critical factors: the heir’s relationship to the deceased person (spouses and children typically face lower rates or full exemptions) and the value of the inheritance itself. Other relatives, such as nieces, nephews, or cousins, may face higher tax rates or lower exemptions compared to immediate family members.

How inheritance tax works in practice

Understanding inheritance taxes work requires following the typical sequence of events after someone dies:

1. Asset identification: The executor or personal representative identifies all assets owned by the decedent

2. Valuation: Assets are appraised at fair market value as of the date of death

3. Debt settlement: Outstanding debts, funeral expenses, and administrative costs are paid from estate funds

4. Distribution: Remaining assets are distributed to heirs according to the will or intestacy laws

5. Tax calculation: Each beneficiary’s inheritance tax obligation is calculated based on what they receive

Unlike estate tax, where one global calculation applies to the entire estate, inheritance tax is assessed separately for each beneficiary. Two siblings inheriting equal shares might owe different amounts if one is exempt (such as a child) while the other is not (such as a step-sibling treated differently under state law).

Example scenario:

Consider a child inheriting a €200,000 apartment in a European jurisdiction that offers a €100,000 exemption for direct descendants and imposes a 10% rate on the excess. The calculation would work as follows:

• Inherited value: €200,000

• Exemption for child: €100,000

• Taxable amount: €100,000

• Tax rate: 10%

• Inheritance tax due: €10,000

Deadlines for filing inheritance tax returns and making payment are typically relatively short—often 6 to 12 months after death in many jurisdictions. Missing these deadlines can trigger interest charges or penalties, adding unnecessary costs during an already difficult time.

Calculating tax owed

Calculating the tax owed on an inheritance can be a complex process, as it depends on several key factors: the value of the inherited assets, the state inheritance tax rates, and the familial relationship between the beneficiary and the deceased person. Inheritance tax is levied on the assets received by beneficiaries, and the tax rate can vary widely based on both the state’s laws and the beneficiary’s relationship to the decedent.

Step 1: Determine the value of inherited assetsStart by identifying and valuing all inherited assets, which may include real estate, cash, securities, and tangible personal property such as vehicles, jewelry, or collectibles. The total value of these assets forms the basis for calculating the inheritance tax.

Step 2: Apply exemptions and deductionsMost states that impose inheritance tax offer exemptions or deductions based on the beneficiary’s relationship to the deceased. Immediate family members—such as spouses, children, and sometimes parents—are often fully exempt or subject to a much lower tax rate. For example, in New Jersey, spouses and children are generally exempt from state inheritance tax, while siblings and more distant relatives may face higher rates.

Step 3: Calculate the taxable amountSubtract any applicable exemptions or deductions from the total value of the assets received. The remaining amount is the taxable inheritance.

Step 4: Apply the appropriate tax rateInheritance tax rates vary based on the state and the beneficiary’s relationship to the deceased. For instance, in Pennsylvania, the inheritance tax rate is 0% for surviving spouses, 4.5% for children and parents, 12% for siblings, and 15% for other heirs. In New Jersey, rates can range from 11% to 16% for non-exempt beneficiaries.

Example calculation:Suppose a Pennsylvania resident leaves $100,000 in personal property to a sibling. The state inheritance tax rate for siblings is 12%. After subtracting any applicable exemptions, the sibling would owe $12,000 in inheritance tax. If the same amount were left to a child, the tax owed would be $4,500 (4.5%).

State variations and planning considerationsNot all states impose an inheritance tax—currently, only five states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) levy this tax. Many states have fully repealed their inheritance tax laws, and the federal government does not impose a federal inheritance tax, though a federal estate tax may apply to very large estates.

Because inheritance tax rates and exemptions vary based on the state where the decedent lived or owned property, and the familial relationship between the beneficiary and the deceased, it’s crucial for beneficiaries to understand the specific rules that apply to their situation. Some states exempt certain value thresholds or specific types of assets, and transfers to charitable organizations are often exempt from inheritance tax.

Minimizing tax liabilityBeneficiaries can sometimes reduce their inheritance tax burden by taking advantage of available exemptions, making charitable donations, or through strategic estate planning. Consulting with a tax professional or estate attorney is highly recommended to ensure compliance with state inheritance tax laws and to explore ways to minimize the tax imposed on inherited assets.

In summary, calculating inheritance tax owed requires a careful review of the value of inherited assets, the applicable state inheritance tax rates, and the relationship between the beneficiary and the deceased person. By understanding how inheritance taxes work and seeking professional guidance, beneficiaries can better preserve the value of their inherited property and ensure they meet all legal requirements.

Global approaches and variations

Inheritance and estate taxes vary dramatically around the world. Some countries levy inheritance tax on heirs, some impose estate tax on the estate itself, some have both, and many have neither. In some jurisdictions, these taxes are imposed as a federal tax, while in others, they are only levied at the state or regional level.

Here’s how several notable jurisdictions handle post-death transfers:

United Kingdom

The UK’s system is commonly called inheritance tax, though it functions more like an estate tax in legal terms. The tax is charged on the deceased’s assets above a nil-rate band (currently £325,000, with additional allowances for primary residences passed to direct descendants). Assets above the threshold face a 40% rate. Spouses and civil partners can transfer unused allowances, effectively doubling the threshold for the surviving partner’s estate.

Canada

Canada takes a different approach entirely. There is no formal inheritance tax or estate tax at the federal or provincial level. Instead, death triggers a “deemed disposition” of assets, meaning unrealized capital gains are taxed as if the deceased person sold everything immediately before death. This means heirs don’t pay tax on what they receive, but the estate may owe significant capital gains tax depending on asset appreciation.

Spain

Spain’s “Impuesto sobre Sucesiones y Donaciones” is a progressive inheritance tax with rates and allowances that differ substantially between autonomous communities. Close family members often receive significant reductions or exemptions, while distant relatives and non-relatives face higher rates. The variation between regions can be dramatic—some communities have effectively eliminated the tax for immediate family members through generous allowances.

Other European countries

Many countries in continental Europe (France, Germany, Belgium, and others) maintain some form of inheritance or succession tax. These are generally progressive, with rates increasing as the inheritance value rises, and highly sensitive to the heir’s degree of kinship. Spouses and children typically enjoy substantial exemptions or lower rates compared to other beneficiaries.

Countries without inheritance tax

Several countries have no inheritance or estate tax at the national level. Australia abolished its federal inheritance tax in the late 1970s. In some countries, inheritance or estate taxes are imposed as a federal tax, while in others, they are only levied at the state or regional level. Other countries rely on income, capital gains, and consumption taxes rather than death-related levies.

Inheritance tax in the United States

A critical point of clarification: there is no federal inheritance tax in the United States. The federal government imposes an estate tax on very large estates (those exceeding $13.61 million per individual as of 2024), but this is paid by the estate itself, not by individual heirs.

At the state level, inheritance tax exists only in five states as of 2025:

• Kentucky

• Maryland

• Nebraska

• New Jersey

• Pennsylvania

Iowa’s inheritance tax was fully repealed for deaths occurring on or after January 1, 2025, leaving this small group as the only states where heirs might face a state inheritance tax on assets received.

Key structural features of state inheritance tax:

• Residence matters: Liability typically depends on where the decedent lived at death

• Property location counts: Real property and some tangible personal property may be taxed based on where the assets are located, even if the decedent lived elsewhere

• Relationship determines rates: The heir’s familial relationship to the deceased directly affects exemptions and rates

• Spouses are universally exempt: In all states impose inheritance tax, surviving spouses owe nothing

• Lineal heirs often exempt: Children, parents, and grandchildren frequently enjoy full exemption or significantly reduced rates

State-by-state examples (2025 rules)

Each state with an inheritance tax has its own structure, rates, and exemptions. Here’s how the five current states approach the tax:

Kentucky

Kentucky exempts spouses, parents, children, grandchildren, and siblings from inheritance tax entirely. More distant relatives and unrelated heirs face graduated rates:

The progressive rates mean larger inheritances to non-exempt beneficiaries face higher percentages on amounts above the exemption threshold.

Maryland

Maryland generally exempts parents, grandparents, spouses, children, grandchildren, siblings, and charitable organizations. Non-exempt beneficiaries face a flat 10% inheritance tax on the clear value they receive.

What makes Maryland unique: it’s the only state that imposes both a state estate tax and an inheritance tax. Large estates can potentially encounter both levies, though the broad family exemptions for inheritance tax mean most states exempt close relatives from any inheritance tax burden even when estate tax applies.

Nebraska

Nebraska exempts spouses, charities, and certain younger relatives entirely. The state uses a tiered system based on relationship:

This structure means a parent or child inheriting $200,000 would owe just $1,000 (1% of $100,000 above the exemption), while an unrelated friend inheriting the same amount would owe $26,250 (15% of $175,000).

New Jersey

New Jersey exempts spouses, domestic partners, civil union partners, lineal ancestors (parents, grandparents), lineal descendants (children, grandchildren), and charities from inheritance tax.

Siblings and certain in-laws receive a $25,000 exemption and then face progressive rates between approximately 11% and 16%. More distant heirs and non-relatives face rates of 15% to 16% on their taxable share with minimal exemptions.

Pennsylvania

Pennsylvania uses a straightforward flat-rate system based on relationship:

Transfers to charitable organizations and government entities are exempt. Pennsylvania also allows a one-time $3,500 family exemption against certain probate assets for close family members.

A practical note: Pennsylvania offers a 5% discount if the inheritance tax is paid within three months of death, while the standard deadline is nine months. This early-payment discount can provide meaningful savings on larger inheritances.

Important reminder: Exact thresholds and rates can change through legislation. Always refer to the latest guidance from each state’s revenue department for current figures when an actual inheritance is involved.

Inheritance tax vs. estate tax

The distinction between inheritance tax and estate tax causes significant confusion, so let’s clarify the differences directly.

Estate tax is a tax imposed on the total value of a deceased person’s estate before any distribution to heirs. The estate itself—through its executor or personal representative—pays the tax from estate funds before beneficiaries receive their shares.

Inheritance tax is assessed on each beneficiary’s individual share after distribution and is paid by the beneficiary (though sometimes arrangements allow the estate to cover it).

Both taxes use fair market value at death as the starting point, but they differ in fundamental ways:

Can both apply?

Yes, in some situations. Maryland uniquely imposes both a state estate tax and an inheritance tax, though not necessarily on the same transfers due to broad family exemptions. At the federal level, only estate tax exists (no federal inheritance tax), so a large estate might owe federal estate tax while certain heirs also owe state inheritance tax.

Illustrative example:

Consider an estate worth $15 million located in Maryland, with assets passing to a surviving spouse and two adult children:

• Federal estate tax: May apply to the amount exceeding $13.61 million (the 2024 exemption)

• Maryland estate tax: May apply to amounts exceeding Maryland’s lower threshold

• Maryland inheritance tax: The surviving spouse and children are exempt, so no inheritance tax is due

However, if that same estate included a bequest to an unrelated friend, that beneficiary receives would face Maryland’s 10% inheritance tax even though the close family members paid nothing.

History and policy debates around inheritance tax

Taxes on wealth transfers at death have existed for centuries, often introduced or expanded during wars and fiscal crises, then relaxed or repealed during periods favoring lower direct taxation.

Historical milestones:

• UK Succession Duty Act 1853: Taxed transfers at death with rates varying by relationship and type of property, laying groundwork for modern death duties

• UK Finance Acts (1894, 1909): Shifted toward consolidated estate-based duties that evolved into today’s inheritance tax system

• US Revenue Act of 1916: Established the modern federal estate tax framework, initially tied to World War I funding needs

• Spain’s Law 29/1987 and Royal Decree 1629/1991: Codified Spain’s modern inheritance tax structure, building on centuries of earlier levies dating to Roman-era taxation of inheritances

Many states repealed their inheritance taxes over the past several decades. As recently as the 2010s, several states that once imposed inheritance tax have either eliminated it entirely or phased it out gradually, with Iowa being the most recent example in 2025.

Arguments in favor of inheritance tax:

• Limits the buildup of dynastic wealth across generations

• Reduces intergenerational inequality and promotes opportunity

• Encourages broader circulation of assets in the economy

• Provides revenue without taxing earned income

Arguments against inheritance tax:

• Perceived as “double taxation” on savings already taxed during the decedent’s lifetime

• Can force sales of family businesses or farms to meet tax liability

• Wealthy families often avoid the tax through sophisticated planning, shifting burden to less affluent households

• Creates administrative complexity for grieving families during difficult times

• Some view it as government overreach into private family wealth transfers

The debate continues, with most states having moved away from inheritance taxation while a handful maintain it as part of their revenue structure.

Planning considerations and ways to reduce inheritance tax

While this article explains general principles, tax planning should always be tailored to the specific laws in force in the relevant jurisdiction and the individual’s circumstances. Consulting a qualified tax professional or estate planning attorney is essential before implementing any strategies.

That said, several common planning approaches can help reduce or eliminate inheritance tax liability:

Lifetime gifting

Many systems treat lifetime gifts more favorably than transfers at death. Annual gift exclusions (such as the $18,000 per recipient federal gift tax exclusion in 2024) allow wealth to be transferred during life without triggering gift or estate tax. Some jurisdictions exempt gifts made a certain number of years before death from inheritance tax calculations entirely.

Life insurance structuring

Properly structured life insurance can pass death benefits outside the taxable estate. Irrevocable life insurance trusts (ILITs) are a common tool in U.S. practice to keep policy proceeds from being included in either estate tax or inheritance tax calculations.

Business and farm reliefs

Many jurisdictions provide special exemptions or reduced valuations for family businesses, farms, and primary residences. These reliefs can significantly reduce the taxable value of inherited property when heirs continue operating the business or farm.

Strategic beneficiary designations

Coordinating wills, trust documents, and beneficiary designations on retirement accounts and life insurance can direct assets toward beneficiaries who face lower or zero inheritance tax. Leaving more to a surviving spouse (universally exempt) and less to distant relatives or non-relatives can minimize total tax paid.

Residency considerations

In the U.S., the difference between living in Pennsylvania (which has inheritance tax) versus Florida (which has no estate or inheritance tax) can be significant for estate planning purposes. While tax considerations alone shouldn’t drive major life decisions, they’re worth factoring into broader planning.

When planning matters most:

Many estates and inheritances fall below applicable thresholds, meaning no inheritance tax is actually payable. However, individuals with substantial assets, complex family situations, or property in multiple states or countries often benefit significantly from proactive planning years in advance of any anticipated transfers.

Key takeaways

• Inheritance tax is levied on beneficiaries who receive assets from a deceased individual, calculated on what each heir personally receives

• As of 2025, only five states in the U.S. impose inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania

• There is no federal inheritance tax—only a federal estate tax on very large estates

• Tax rates and exemptions vary based on the heir’s relationship to the decedent, with spouses universally exempt and immediate family members often paying little or nothing

• Inheritance tax differs from estate tax in who pays (beneficiary vs. estate) and how rates are applied

• Many countries have abolished inheritance taxes, while others maintain them as part of their fiscal systems

• Proactive estate planning can significantly reduce or eliminate inheritance tax liability for heirs

Understanding how inheritance tax works puts you in a better position to plan effectively—whether you’re expecting to receive an inheritance or thinking about what you’ll leave behind. While the rules can seem complex, the core concepts are straightforward once you understand that this tax targets the recipient based on their relationship to the deceased and the value of what they receive.

If you live in one of the five states with inheritance tax, or if you expect to inherit from someone who does, consider consulting with a qualified estate planning attorney or tax professional to understand your specific situation and explore strategies that might reduce your tax burden.