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Valor Tax Relief Team
Professional Tax Planning & Resolution Specialists
Introduction
When a loved one passes away, families often face not only emotional challenges but also complex financial and tax obligations. Estate and inheritance taxes can significantly impact the wealth you leave behind or receive, making it crucial to understand how these taxes work and how to minimize their impact.
Whether you're planning your own estate or dealing with inherited assets, understanding the difference between estate taxes and inheritance taxes—and knowing the current exemption amounts and rates—can help you make informed decisions that protect your family's financial future.
In this comprehensive guide, we'll explore everything you need to know about estate and inheritance taxes, including federal rates, state exemptions, and proven strategies to reduce your tax burden.
What Are Estate Taxes?
Estate taxes are federal taxes imposed on the total value of a person's assets at death before those assets are distributed to heirs. These taxes apply to property, investments, business interests, and other valuables, all based on fair market value at the time of death.
However, most Americans will never pay federal estate taxes because of high federal estate tax exemptions. These were made permanent through recent tax legislation. In 2025, the exemption is $13.99 million per person and in 2026 it is $15 million. This will be adjusted annually for inflation.
Federal Estate Tax Rates
If an estate exceeds the exemption amount, the excess is taxed on a sliding scale from 18% to 40%. Here's how the estate tax brackets work:
| Tax Rate | Taxable Amount | Tax Owed |
|---|---|---|
| 18% | $0-$10,000 | 18% of taxable amount |
| 20% | $10,001-$20,000 | $1,800 + 20% of amount over $10,000 |
| 22% | $20,001-$40,000 | $3,800 + 22% of amount over $20,000 |
| 24% | $40,001-$60,000 | $8,200 + 24% of amount over $40,000 |
| 26% | $60,001-$80,000 | $13,000 + 26% of amount over $60,000 |
| 28% | $80,001-$100,000 | $18,200 + 28% of amount over $80,000 |
| 30% | $100,001-$150,000 | $23,800 + 30% of amount over $100,000 |
| 32% | $150,001-$250,000 | $38,800 + 32% of amount over $150,000 |
| 34% | $250,001-$500,000 | $70,800 + 34% of amount over $250,000 |
| 37% | $500,001-$750,000 | $155,800 + 37% of amount over $500,000 |
| 39% | $750,001-$1,000,000 | $248,300 + 39% of amount over $750,000 |
| 40% | $1,000,001+ | $345,800 + 40% of amount over $1,000,000 |
Federal estate taxes are typically paid out of the estate itself before any distributions are made to heirs. The executor of the estate is responsible for filing the return and ensuring any taxes owed are paid.
State Estate Tax Exemptions
Some states impose their own estate taxes. Here are the states with estate taxes and their 2025 exemption amounts:
What Are Inheritance Taxes?
Inheritance taxes are state taxes levied on a deceased individual's assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is based on the total value of the estate. The assets can be anything from money to stocks to property.
States with Inheritance Taxes
Currently, six states impose an inheritance tax:
| State | Tax Rates |
|---|---|
| Kentucky | 0%-16% |
| Maryland | 0%-10% |
| Nebraska | 0%-15% |
| New Jersey | 0%-16% |
| Pennsylvania | 0%-15% |
Note: Iowa eliminated its inheritance tax for deaths as of January 1, 2025.
Your tax rate is typically based on your relationship to the decedent. Surviving spouses are almost always exempt from this tax. In some states, so are sons, daughters, and parents of the deceased. Usually, you would pay a higher rate if you had no familial relationship with the decedent.
How Inheritance Taxes Work
Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Each state has its own exemption rules:
- Assets are taxed after they reach a certain value threshold
- For example: If your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million
- Tax rates vary based on relationship to the deceased
- Spouses are typically exempt from inheritance taxes
How to Reduce Estate and Inheritance Taxes
Although federal estate taxes now affect only a small percentage of estates, planning still matters, especially in high-tax states or for individuals with large estates. Here are some common ways to reduce your estate's tax burden:
1. Annual Gifts
Gift up to $18,000 per person per year (2025) without affecting your estate exclusion. This is a simple way to gradually transfer wealth while you're still alive.
2. Direct Payments for Education or Medical Expenses
Payments made directly to schools or hospitals are not taxable gifts. This allows you to help family members without using your gift tax exemption.
3. Irrevocable Life Insurance Trusts (ILITs)
These remove life insurance from your taxable estate, potentially saving significant taxes while providing liquidity for your heirs.
4. Charitable Giving
Donations to qualified charities reduce the taxable value of your estate while supporting causes you care about.
5. Use Portability
Make sure your executor files IRS Form 706 to preserve your spouse's unused exemption, effectively doubling the amount you can pass tax-free.
State-Level Planning
For state-level inheritance and estate taxes, tailored planning may involve:
- Changing residency to a lower-tax state
- Adjusting how assets are titled
- Using trusts to control distributions
- Strategic gifting strategies
Tax Help with Estates
We understand that taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry. If you are planning to leave behind assets for your loved ones after death, you can take steps to reduce estate taxes.
Proactive Estate Tax Planning
Here are some effective strategies to consider:
- Pay for educational or medical expenses directly from your estate - these payments are exempt from taxes if funds go directly to the provider
- Set up irrevocable trusts or life insurance trusts (ILITs) to ensure assets are not used to pay taxes
- Consider charitable remainder trusts for philanthropic goals while reducing estate value
- Use family limited partnerships to transfer business interests at reduced values
A team of expert tax professionals can help you navigate these complex strategies and ensure your estate plan maximizes the wealth passed to your heirs while minimizing tax obligations.
When to Seek Professional Help
Consider consulting with tax professionals if:
- Your estate value approaches federal or state exemption limits
- You own business interests or complex assets
- You have beneficiaries in different states with varying tax laws
- You want to implement advanced strategies like dynasty trusts or charitable planning
Conclusion
Understanding estate and inheritance taxes is crucial for protecting your family's wealth and ensuring your legacy is passed on as intended. While federal estate taxes affect only a small percentage of Americans, state-level taxes and inheritance taxes can impact many more families.
The key to minimizing these taxes lies in proactive planning and understanding the current exemption amounts, rates, and available strategies. Whether you're planning your own estate or dealing with inherited assets, taking the time to understand these tax implications can save your family significant money and provide peace of mind.
Remember, estate and inheritance tax laws are complex and constantly evolving. Working with experienced tax professionals can help you navigate these complexities and implement strategies that protect your wealth for future generations.
Need Help with Estate Tax Planning?
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