Understanding State Estate and Inheritance Taxes
How Do State Estate and Inheritance Taxes Work?
While federal estate tax applies only to estates exceeding $13 million (as of mid-2025), state-level estate and inheritance taxes create significant liability for more modest estates in the states that impose them. Sixteen states and Washington D.C. currently impose some form of state estate or inheritance tax, with exemption levels ranging from $1 million to $9.1 million. For investors with substantial assets or real property in multiple states, understanding which states can tax your estate and how to minimize that liability is critical to effective estate planning.
Quick definition: State estate tax is imposed on the transfer of property at death in certain states; inheritance tax is imposed on the heirs or beneficiaries receiving property. Both reduce the amount that passes to beneficiaries.
Key takeaways
- Sixteen states and D.C. impose estate or inheritance tax; most have exemption levels between $1–$9.1 million
- Estate tax applies to the total estate; inheritance tax applies to what beneficiaries receive
- States where you own real property can impose estate tax regardless of your state of domicile
- Portability of federal exemptions does not apply to state estate taxes; each spouse's exemption is separate
- Married couples can use proper titling and trusts to maximize exemptions in high-tax states
- Timely filing of federal Form 706 may be required to preserve state tax benefits
- Some states impose inheritance tax on spouses, while others exempt them
States with Estate and Inheritance Taxes
As of mid-2025, the following states impose state estate tax, inheritance tax, or both:
Estate tax states (tax the estate): Connecticut, Delaware, Illinois, Massachusetts, Maine, Maryland, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. These states typically exempt estates below a threshold ($2–$9.1 million depending on the state) and apply graduated rates to amounts above the exemption.
Inheritance tax states (tax the recipients): Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. These states usually exempt close family members (spouses, children, parents) and tax more distant relatives and unrelated heirs.
Both types: Maryland and New Jersey impose both estate and inheritance tax.
The states with the most favorable exemptions include Washington ($2.193 million), Oregon ($1.821 million), and Maine ($6.86 million), though exemption levels adjust annually for inflation. States with high exemptions (like Massachusetts, at $1 million) or low exemptions can still result in significant tax even for moderately wealthy estates.
How State Estate Tax Works
State estate tax is calculated similarly to federal estate tax: the value of your entire estate as of the date of death is added up, the applicable exemption is subtracted, and the applicable tax rate is applied to the balance. The tax is paid from estate assets before distribution to heirs.
Example: A Massachusetts resident dies with an estate of $3 million. Massachusetts has an exemption of $1 million and a top rate of 12%. The taxable estate is $2 million ($3 million less $1 million exemption). The state estate tax is approximately $240,000, reducing the amount available to heirs.
The same $3 million estate in a state without an estate tax passes entirely to heirs (subject only to federal tax if applicable, which at $3 million is unlikely).
How State Inheritance Tax Works
Inheritance tax applies based on the relationship of the heir to the deceased and the amount inherited. Close family members—spouses, children, grandchildren—are often exempt or taxed at lower rates. More distant relatives and unrelated heirs face higher tax rates or full taxation.
Example: A Pennsylvania resident dies with an estate of $500,000. Pennsylvania exempts spouses entirely but taxes other heirs. A sibling inherits $100,000. Pennsylvania's inheritance tax on a sibling is approximately 15%, resulting in a $15,000 tax liability. A spouse inheriting $500,000 pays zero inheritance tax.
This creates an incentive to plan inheritance: leaving assets to exempt relatives (spouses, children) rather than non-exempt relatives (siblings, grandchildren) can avoid state inheritance tax.
State Tax on Multi-State Property
An important distinction for investors with real property in multiple states: a state can tax real property located within its borders at the time of death, even if the deceased was not a resident or domiciliary of that state.
Example: A California resident owns a vacation home in Colorado worth $500,000. Upon death, the estate includes the Colorado real property. Colorado can impose its estate tax on the value of the Colorado property (unless Colorado offers an exemption to non-residents, which it does not). The estate must include the Colorado property value in both the California resident's state estate tax calculation (if applicable) and any Colorado state estate tax, creating a potential for double taxation unless a credit is available.
To minimize this risk, investors with real property in multiple states should understand each state's treatment of out-of-state owners and consider holding multi-state real estate in a trust or LLC that allows for favorable treatment.
Married Couples and the Exemption Problem
The federal government allows portability of the estate tax exemption between spouses: when one spouse dies, the unused exemption can be transferred to the surviving spouse, allowing the survivor to use both exemptions when they die. However, most states do not allow portability. Each spouse's exemption is independent, and state law applies separately to each estate.
This creates an important planning opportunity and risk:
The opportunity: Couples can structure their assets and wills to use both spouses' exemptions, doubling the state tax-free amount passing to heirs.
The risk: If one spouse's will leaves everything to the surviving spouse, the first spouse's entire exemption is wasted when they die. The surviving spouse then has only their own exemption when they die, and the excess is taxed at the state level.
Example: A couple lives in Connecticut, each with a $3 million net worth (total $6 million). Connecticut's exemption is $3.6 million per person. If Spouse A dies and leaves everything to Spouse B, Spouse A's exemption is wasted, and the couple's total exemption is only $3.6 million (Spouse B's exemption). The couple's $6 million estate faces Connecticut estate tax on the $2.4 million excess. Had they structured their estate properly—with Spouse A's will leaving $3.6 million to heirs other than Spouse B, and Spouse B's will leaving their remaining assets to heirs—both exemptions could have been used, and the entire $6 million would be tax-free.
Titling, Trusts, and Exemption Strategies
To maximize the use of both spouses' exemptions in states that do not allow portability, couples often use these strategies:
Credit shelter trust (also called a bypass trust): Spouse A's will directs up to the exemption amount into a trust for the benefit of Spouse B and children, with the remainder passing outright to Spouse B. This uses Spouse A's exemption and removes the trust assets from Spouse B's later estate.
Community property titling (in community property states like California, Texas): Property held as community property is stepped up in basis at the death of either spouse, providing a basis advantage and potentially reducing estate tax by allowing each spouse's exemption to apply to their half of the community property.
Life insurance trusts: Large insurance proceeds can be held in a life insurance trust that is outside the estate, avoiding state (and federal) estate tax on the proceeds.
Qualified personal residence trusts: These allow you to retain the right to live in your home for a set period while removing appreciation from your estate, potentially reducing the value of the asset for tax purposes.
State Estate and Inheritance Tax Decision Tree
Real-world examples
Example 1: The Married Couple in Massachusetts Robert and Jennifer are a married couple living in Massachusetts with a combined net worth of $4 million. Massachusetts has an exemption of $1 million per person and a top tax rate of 12%. Without proper planning, if Robert dies and leaves everything to Jennifer, his $1 million exemption is wasted. Upon Jennifer's death, the couple's combined exemption is only $1 million (Jennifer's), and the $3 million excess is subject to Massachusetts estate tax at 12%, resulting in $360,000 in tax.
With proper planning using a credit shelter trust, Robert's will leaves $1 million to a trust for Jennifer's benefit (using his exemption), and the remaining $1 million goes to Jennifer outright. Upon Jennifer's death, she has her own $1 million exemption, and the couple's entire $4 million has been sheltered from Massachusetts estate tax through the use of both exemptions.
Example 2: The Out-of-State Real Property Owner A Florida resident (no state estate tax) owns a vacation home in Connecticut worth $1.2 million. The Florida resident dies, and the estate is valued at $2 million (home in Connecticut plus other assets in Florida). Connecticut imposes estate tax on the Connecticut real property. The executor must include the $1.2 million Connecticut property in the Connecticut estate tax calculation. Connecticut's exemption is $3.6 million, so the entire Connecticut property is exempt from Connecticut estate tax. However, had the property been worth more or the estate structure different, Connecticut could have claimed estate tax on the Connecticut property even though the owner was a Florida resident.
Example 3: The Inheritance Tax Trap Harold, a Pennsylvania resident, dies and leaves his estate equally among his four children and his sibling (his brother). His estate is $1 million, so each heir receives $200,000. Pennsylvania exempts children but taxes siblings at 15%. The brother owes $30,000 in Pennsylvania inheritance tax on the $200,000 inheritance. The four children each owe zero inheritance tax. Had Harold's will been structured to give more to the exempt heirs and less (or nothing) to the taxable heir, the total family tax could have been reduced.
Example 4: The Life Insurance Planning Case A New York resident (state estate tax at 3.06% top rate) has a $5 million estate and a $1 million life insurance policy. Without planning, the insurance proceeds are included in the taxable estate, resulting in estate tax of approximately $300,000. By placing the policy in an irrevocable life insurance trust, the proceeds are excluded from the estate, reducing the taxable estate to $4 million and eliminating the tax on the insurance proceeds (approximately $30,600 in New York estate tax savings).
Common mistakes
Mistake 1: Assuming state estate tax exemptions are portable like federal exemptions Most states do not allow portability. If you are married and die, your exemption does not automatically pass to your spouse. You must use proper trust structures to preserve both exemptions. Failing to do so can waste a spouse's exemption entirely.
Mistake 2: Ignoring state estate tax on out-of-state property A state can tax real property within its borders even if you are not a resident. If you own real property in a high-tax state, that property is subject to that state's estate tax regardless of where you live. Plan accordingly.
Mistake 3: Leaving everything to the surviving spouse In high-estate-tax states, leaving everything to the surviving spouse at the first spouse's death wastes the first spouse's exemption. Proper estate planning uses the first spouse's exemption and then passes the remainder to the surviving spouse.
Mistake 4: Not documenting your domicile if you have moved recently If you have recently moved from a high-tax state to a low-tax or no-tax state, courts and tax authorities may challenge your claimed residency. Without clear documentation of your domicile shift, the state you left may try to claim estate tax on your death. Establish and document your new domicile carefully.
Mistake 5: Holding multi-state real estate in individual names If you own real property in multiple states and each property is in your individual name, each property will be included in your probate estate in each state, potentially triggering estate tax in multiple states and requiring probate in multiple jurisdictions. Holding property in trusts or entities can reduce this complexity.
FAQ
Which states have the most generous estate tax exemptions?
Washington has an exemption of approximately $2.193 million, Oregon $1.821 million, and Maine $6.86 million. The exact amounts adjust annually for inflation. Massachusetts has a notably low exemption of $1 million. Check current state tax laws for the most up-to-date figures.
Do I have to pay state estate tax if I am not a resident of the state where I own property?
If you own real property in a state with estate tax, that state can impose estate tax on the value of the property even if you are not a resident or domiciliary of that state. However, you may be entitled to credits or exemptions if you are domiciled elsewhere.
Does my spouse have to pay inheritance tax?
Most states exempt spouses from inheritance tax entirely. However, a few states impose inheritance tax on spouses at reduced rates. Pennsylvania, for example, exempts spouses and descendants but taxes more distant relatives.
Can I move to a no-estate-tax state to avoid state estate tax?
Establishing a new domicile in a state without estate tax is a valid strategy, but you must establish genuine domicile. If you own real property in a high-tax state, that property remains subject to that state's estate tax regardless of your domicile. You must also properly document your domicile shift.
What is a credit shelter trust, and do I need one?
A credit shelter trust (or bypass trust) is a trust that holds up to the amount of your estate tax exemption, allowing it to benefit your family without being included in the surviving spouse's taxable estate. In states that do not allow portability, this strategy can preserve both spouses' exemptions.
Related concepts
- Estate and Gift Tax Basics
- State Residency and Domicile Rules
- State Treatment of Retirement Income
- Tax Loss Harvesting
- Glossary
Summary
Sixteen states and Washington D.C. impose state-level estate or inheritance taxes, with exemptions ranging from $1 million to $9.1 million. State estate tax applies to the entire estate in certain states; state inheritance tax applies to what heirs receive. States where you own real property can impose estate tax on that property even if you are domiciled elsewhere. Most states do not allow portability of exemptions between spouses, so couples must use proper trust structures to ensure both spouses' exemptions are used. Married couples should structure their estates with credit shelter trusts to maximize exemptions. Investors owning real property in multiple states should consider holding that property in trusts or entities to minimize multi-state estate tax complexity. Establishing domicile in a state without estate tax is a valid planning strategy but requires genuine residency and does not protect out-of-state property from state taxation.