Estate tax vs. inheritance tax: Who pays & in which states?

Over your lifetime, you work to build a legacy you're proud of. There's no reason for that legacy to end when you pass away. To keep it going, you can transfer your wealth to your loved ones after you die.

As you think about how that transfer will take place, it’s essential to understand how taxation factors into your plans. A clear grasp of estate tax vs. inheritance tax can help you make tax‑efficient decisions that protect your lifetime wealth and support a smoother transfer to your beneficiaries. Both are often referred to as “death taxes,” but they operate very differently and can influence how much your beneficiaries ultimately receive.

Whether you plan to pass on money, property or a business, understanding the potential tax implications is essential for protecting your legacy and ensuring your wealth supports future generations.

Both inheritance taxes and estate taxes are referred to as "death taxes." Although both may apply to you, they are distinctly different in how they are applied:

• An estate tax is levied against your estate, or the whole of what you own when you die. It's based on the total value of your cash, investments, property and other assets.
• An inheritance tax is levied against your beneficiaries, or those who received something from you upon your death. It's based on what they inherited and their relationship to you.

The federal government imposes an estate tax but does not levy an inheritance tax, leaving those rules entirely to the states. Individual states may have an estate tax, an inheritance tax, neither or both (currently, only Maryland has both). The taxation imposed varies based on where you lived and owned property—where your beneficiaries live doesn't matter.

The federal estate tax applies to the portion of an estate that exceeds a specific lifetime exemption level. If your estate exceeds that limit, then the federal tax rate you'll face ranges from 18% to 40% of the value of your estate that's above the lifetime exemption amount.

Starting in 2026, the federal estate, gift, and generation-skipping tax (GST) exemption is $15 million per individual (or $30 million per married couple with portability). That amount is permanent and indexed for inflation starting in 2027.

Like the federal tax, states that have an estate tax only apply it to the portion of an estate that goes above a specific amount. Both the exemption amount and the taxation rate vary by state. Currently, only 12 states and the District of Columbia impose an estate tax:

When it comes to inheritance taxes, what matters is the state where you lived or owned property, which shapes how your wealth is taxed as it passes to heirs. For example, live in Texas (a state with no income or estate tax) and leave money or property to a family member who lives in New Jersey (a state with an inheritance tax). Your family member won't have to pay taxes on their inheritance because it's dictated by Texas' tax rules, not New Jersey's.

Currently, only five states impose an inheritance tax:

Another important factor in calculating inheritance tax is the relationship between you (as the deceased) and the beneficiary. All six states with an inheritance tax don't levy it on surviving spouses. Kentucky, Maryland and New Jersey also exempt transfers to surviving children and grandchildren. Other states generally tier their inheritance tax rates depending on the relationship, with non-related beneficiaries paying the highest rates.

One tax your heirs generally don’t face upfront is capital gains tax, thanks to the stepped‑up basis rules that can reduce the tax impact when inherited assets are sold. Capital gains tax usually kicks in when you sell something for a higher price than its basis, which is typically the price you paid for it. For example, if you buy $100 of stock and later sell those shares for $150, you'll owe capital gains tax on the $50 increase.

For inherited assets, however, the IRS applies a rule called "stepped-up basis" to assets such as investments, stocks, bonds or real estate. This means your beneficiary's basis in the property is its value at the time of the account owner's death rather than its original purchase price. This does not apply to IRA, 401(k), pensions, tax-deferred annuities and money market accounts.

Interested in more smart tax strategies?

Explore practical ways to minimize taxes when selling or transferring property. Learn how to reduce capital gains tax on real estate.

Go deeper

Understanding the difference between estate vs. inheritance taxes is just one aspect of figuring out how to distribute your assets after you're gone. Managing the details of your assets now can help you better estimate what your estate and heirs might be dealing with later.

To help make sure you and your beneficiaries are prepared, consider working with an estate attorney and accounting professional who are familiar with federal and state death tax rules. They can work in partnership with a Thrivent financial advisor to look at your unique situation and provide guidance on how your assets can make the biggest possible impact after your death.