When we lose someone, we love their presence and the memories we share often mean more than anything they leave behind. But when they do leave us gifts a home, savings, cherished items these tokens are meant to ease our journey forward, to help us live on in a way they would have wanted. Yet, in some states, an inheritance tax may apply, turning this inheritance into something that requires a little more planning and care. Inheritance tax is what some states charge when family members or friends receive assets after a loved one has passed away. Unlike estate tax, which is paid by the estate itself before anything is handed out, inheritance tax is the responsibility of the beneficiary — that is, the person who inherits. It’s important to understand the difference because, ultimately, this tax impacts what we hold onto from our loved one’s legacy.

A Look at Inheritance

Tax and Why It’s Less Common

Inheritance taxes aren’t as common as they used to be. Once upon a time, the U.S. had a national inheritance tax to support the costs of war and national needs. But as time passed, most states began phasing out these taxes, seeing them as burdensome or even discouraging to people looking to build lives and legacies in their states. Today, only six states in the U.S. have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania and, by 2025, Iowa’s inheritance tax will be gone too. As fewer states continue this practice, it’s a reminder that such a tax can feel at odds with the spirit of giving and receiving after loss, as families may feel it intrudes on personal legacies and discourages family investments.

Inheritance Tax and Estate Tax

A Subtle but Important Difference Both inheritance and estate taxes are often called “death taxes.” Although that term sounds bleak, it helps capture the fact that both types are only relevant once someone has passed. The key difference is who pays them: Estate Tax is paid by the estate, meaning all the person’s belongings and savings are calculated, and a tax is paid before anything is handed to family or friends. This tax considers the overall value of the estate.

Inheritance Tax is paid by the individual who inherits something. The amount of tax is based on what each beneficiary receives, not the total estate. Each tax type usually comes with exemptions, meaning that up to a certain amount, there’s no tax. For instance, if your inheritance falls below a state’s exemption level, you don’t owe the tax. Only Maryland has bothan inheritance tax and an estate tax, making it the rare state where both could apply.

How Different States Handle Inheritance Tax

Inheritance tax laws and exemptions can vary quite a bit from state to state. In most cases, if you’re closely related to the person who passed away — a spouse, child, or grandchild — you likely won’t have to pay the inheritance tax. Here’s a quick look at how the six states with inheritance tax treat it:

Iowa: Close family, including children and grandchildren, don’t pay. Others pay between 2% and 6% depending on how much they inherit.

Kentucky: Spouses, children, and parents don’t pay, but other relatives pay up to 16%.

Maryland: Close family is exempt, but others pay a 10% tax.

Nebraska: Spouses and charities are exempt, while close family gets a $100,000 exemption and a 1% rate. Distant relatives pay more.

New Jersey: Spouses, children, and close family don’t pay. Siblings get a partial exemption, and others may pay up to 16%.

Pennsylvania: Spouses, minor children, and certain

others are exempt, with rates ranging from 4.5% to 15% for others.

What Inheritance Tax Means for Families

The details of inheritance tax can feel like they cloud the intentions of a loved one’s final gifts. While these laws aim to manage and distribute assets fairly, it can feel a bit daunting to manage during a time of grief and transition. Beyond knowing whether inheritance tax applies, there are other important rules to consider:

What’s Included in Inheritance Tax

This generally includes money, property, and any valuable assets left behind. Some states even count items given away right before death, so it’s helpful to understand how they calculate what you’ll inherit. Paying the Tax on Time: Most states give beneficiaries a specific timeline to file the tax and offer forms to help, often allowing a discount for early payment. If taxes are filed late, penalties and interest may apply.

Setting the Value of Inherited Property

Inheritance tax is based on the “fair market value” of what’s left behind, meaning what it would sell for in today’s market. The person managing the estate works with experts to determine these values.

Getting Help During This Time

Inheritance tax is complex, and every situation is unique. If you find yourself responsible for paying inheritance tax, it might help to speak with a tax expert who understands state laws and how they apply to your family’s story. While it’s never easy to face these details, support is available to guide you through the steps. Remember, what matters most is preserving the legacy your loved one wanted to leave. Their generosity, whether large or small, is meant to help you and carry on their memory. Taking the time to honor that can help make the process a little less overwhelming, leaving you with what’s truly important: the love they shared, the moments that mattered, and the legacy they trusted you to keep.