If you’re planning to set aside an inheritance for your loved ones, we recommend researching your state’s inheritance tax laws. As of January 1st, 2020, six states have an inheritance tax and twelve states plus DC levy an estate tax.
While estate taxes are only collected from a small percentage of extremely wealthy families, inheritance taxes can be collected from anyone that receives resides in a state that levies them.
This guide outlines the six states that impose an inheritance or death tax. We’ve also listed each state’s inheritance tax rates. This will help you calculate the amount your heirs will owe the state when you pass away.
Quick Article Guide:
- Which States have an Inheritance Tax?
- Inheritance Tax Rates and Brackets in Iowa
- Inheritance Tax Rates and Brackets in Kentucky
- Inheritance Tax Rates and Changes in Maryland
- Inheritance Tax Rates and Changes in Nebraska
- Inheritance Tax Rates and Changes in New Jersey
- Inheritance Tax Rates and Changes in Pennsylvania
- We Can Help
Currently, there are six states that collect an inheritance tax. These states include: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Each state sets its own inheritance tax rules, exemption amount, and rates. Most states use a progressive scale which means higher tax brackets for larger inheritances.
The amount of the inheritance tax your heirs will owe depends on how they are related to you and whether or not your state offers an exemption. Direct family members are usually exempt from state inheritance taxes, but this is not always the case with in-laws, cousins, and half siblings.
In the following section, we’ve broken down each state’s inheritance tax laws and rates. We’ve also included some proven strategies that can prevent your loved one’s from owing taxes on the assets you intend to leave them.
In Iowa, some family members are entirely exempt from inheritance taxes. Also known as “Schedule A” beneficiaries, these family members include: surviving spouses, parents, grandparents, and great grandparents.
Legally or biologically-related children including step-children, adopted children, grandchildren, and great grandchildren are also exempt from inheritance taxes in Iowa. In addition, most charitable, educational, and religious organizations are also exempt for inheritance taxes in Iowa.
The following table outlines the inheritance tax rates for schedule B through F beneficiaries:
Relation to Deceased: Beneficiary Schedule: Exemption Amount: Tax Rate: Brother or sister (Including half-brothers and sisters), sons-in-law and daughters-in-law B $0 5 to 10% Aunts, uncles, nieces, nephews, cousins, brother or sister-in-law, step-grandchildren, foster children, or any unrelated individual C $0 10 to 15% Corporations, firms, social and fraternal organizations that do not qualify as educational, religious, or charitable D $0 15% Foreign educational, religious, or charitable organizations E $500 10% Unknown contingent heirs F $0 5%
One way to avoid inheritance tax is to buy a permanent life insurance policy instead. The death benefit from an insurance policy is not subject to inheritance taxes. This will allow you to spend your retirement savings guilt-free, and leave something behind to the ones you love.
In Kentucky, inheritance beneficiaries are classified into one of three categories: A, B, or C. As of June 30th, 1998, a surviving spouse, parent, child, grandchild, brother, sister, half-brother, or half-sister is classified as a Class A beneficiary, and they are exempt from inheritance taxes.
Class B beneficiaries which include the deceased’s niece, nephew, half-niece, half-nephew, aunt, uncle, son-in-law, daughter-in-law, and great grandchildren are not exempt from inheritance taxes. If the amount of the inheritance the receive is more than $1,000, it will be subject to an inheritance tax rate of 4 to 16%.
We’ve displayed a breakdown of the tax rates for Class B beneficiaries below:
Inheritance Tax Rates for Class B Beneficiaries
|Total Amount of Inheritance|
|$1,000 to $9,999||$10,000 to $19,999||$20,000 to $29,999||$30,000 to $44,999||$45,000 to $59,999||$60,000 to $99,999||$100,000 to $199,999||$200,000 or more|
|4% of amount over $1,000||$360 + 5% of amount over $10,000||$860 + 6% of amount over $20,000||$1,460 + 8% of amount over $30,000||$2,660 + 10% of amount over $45,000||$4,160 + 12% of amount over $60,000||$8,960 + 14% of amount over $100,000||$22,960 + 16% of amount over $200,000|
Class C beneficiaries are any beneficiary that is not included in Class A or B and any cousins of the deceased. These beneficiaries receive an exemption of $500, and any inheritance that exceeds this amount will be taxed at a rate of 6 to 16%.
We’ve further illustrated the tax rates for Class C beneficiaries in the table below:
Inheritance Tax Rates for Class C Beneficiaries
|Total Amount of Inheritance|
|$500 to $999||$1,000 to $9,999||$10,000 to $19,999||$20,000 to $29,999||$30,000 to $44,999||$45,000 to $59,999||$60,000 to $99,999||$100,000 to $199,999||$200,000 or more|
|6% of amount over $500||$30 + 6% of amount over $1,000||$570 + 8% of amount over $10,000||$1,370 + 10% of amount over $20,000||$2,370 + 12% of amount over $30,000||$4,170 + 14% of amount over $45,000||$6,270 + 16% of amount over $60,000||$12,670 + 16% of amount over $100,000||$28,670 + 16% of amount over $200,000|
To avoid inheritance taxes, you can also purchase a permanent life insurance policy with a fixed death benefit until the age of 100 or later. Any individual that is listed as your beneficiary will not be subject to inheritance taxes, even if they are not a member of Class A.
The best type of life insurance coverage for leaving an inheritance behind is known as guaranteed universal life insurance. These policies do not require any investing and they offer lifelong coverage with a fixed rate.
Maryland is currently the only state that imposes an estate tax and an inheritance tax. The difference between the two is that an estate tax is levied against the entire estate, regardless of who the beneficiaries of the estate are.
An inheritance tax, on the other hand, can be collected from anyone that receives money from the deceased.
Beneficiaries that are exempt from Maryland’s inheritance tax include:
- For decedents who pass away on or after July 1, 2000 – children or other lineal descendant, the spouse of a child or other lineal descendant, a spouse, parent, grandparent, step-child or step-parent, siblings, or a corporation only having certain of these people as stockholders
- For decedents who pass away on or after July 1, 2009 – a primary residence owned by domestic partners that was held in joint ownership at the time of the decedent’s death
If any other beneficiary receives property after the decedent has passed – including property passed to a domestic partner other than a jointly-owned primary residence – is contingent to Maryland’s inheritance tax. The current Maryland tax rate is 10%.
It is important to note that Maryland’s estate tax exemption is only $5 million, as opposed to the federal exemption of $11.58 million. This means that your heirs could potentially owe state and federal estate taxes, personal inheritance taxes.
If your estate is worth more than $5,000,000 you should consider an ILIT. An irrevocable life insurance trust can help you preserve your estate by separating your life insurance policy from your personal assets. The death benefit can then be used to settle your estate’s tax obligations with the IRS, leaving your assets free and clear.
To learn more about an irrevocable life insurance trust, please give us a call at (855) 247-9555. You can also request a free quote online below to instantly compare rates from dozens of permanent life insurance providers.
These are exemptions from Nebraska’s inheritance tax:
- Surviving spouses and charities – fully exempt
- Immediate relatives (Class 1): parents, grandparents, siblings, children, or any other lineal descendant (including those legally adopted) – exemption of $40,000
- Remote relatives (Class 2): aunts, uncles, nieces, and nephews related to decedent by blood or legal adoption, other lineal descendants of the same, and the spouse/surviving spouse of any such persons – exemption of $15,000
- Any other transferees (Class 3) – exemption of $10,000
- Any money from the estate that immediate family members are entitled to, certain payments from employee benefit plans, and insurance policy proceeds that go to a named beneficiary (not the estate) – fully exempt
The following table outlines the inheritance tax rates for Nebraska beneficiaries:
Relation to Deceased: Beneficiary Class: Exemption Amount: Tax Rate: Immediate relatives 1 $40,000 1% Remote relatives 2 $15,000 13% All other transferees 3 $10,000 18%
The death benefit from a life insurance policy is not taxed in Nebraska. So if you’re planning to leave your assets to anyone other than your spouse, consider purchasing a permanent life insurance policy. These policies can be used to provide an untaxed inheritance, or fund an ILIT.
To learn more about using life insurance to leave an inheritance or fund an irrevocable life insurance trust, call us at 855-247-9555. You can also instantly compare rates for a permanent life insurance policy using our form below.
In October 2016, Governor Christie signed new legislation into law that would repeal any existing estate tax laws by 2018. Despite repealing their estate tax laws, New Jersey will continue to collect taxes from anyone who receives an inheritance from one of their residents. Like other states that collect an inheritance tax, New Jersey groups its beneficiaries into classes.
Class “A” beneficiaries are exempt from inheritance taxes in the state of New Jersey. These beneficiaries include a surviving spouse, domestic partner, civil union partner, child, grandchild, great grandchild, parent, grandparent, great grandparent, step-child, adopted child, or a mutually acknowledged child.
In 1963, New Jersey eliminated their Class “B” schedule, but they continue to assign any beneficiary that does not belong in Class A to Class C, D, or E. We’ve broken down the beneficiaries assigned to each of these classes and their respective tax rates in the table below:
|Relation to Deceased:||Beneficiary Class:||Amount of Inheritance:||Tax Rate:|
|Brother, sister, son-in-law, and daughter-in-law||C||Up to $25,000||0%|
|Up to $1,075,000||11%|
|Any transferee, distributee, or beneficiary not classified as A, C, or E||D||First $700,000||15%|
|Charities, religious institutions, educational and medical institutions, the State of New Jersey or any political subdivisions of New Jersey||E||N/A||0%|
In New Jersey, any individual who receives an inheritance for less than $500, or the proceeds from a life insurance policy, is also exempt from inheritance taxes. For this reason, most financial advisers recommend buying life insurance to leave an inheritance to any individual or entity that does not belong to Class C or E.
Life insurance payouts are confidential, which prevents your surviving family members from seeing who you left your inheritance to. In addition, the payout from a life insurance policy is not subject to intervention from the courts, or any surviving family members.
For deaths that occurred on or after January 1, 1995, transfers to the surviving spouse are completely exempt. In addition, if a child under the age of 21 dies after August 31, 2000, their estate will transfer to the child’s natural parent, step-parent, or adoptive parent untaxed.
In Pennsylvania, working family farms (with a gross income of at least $2,000), and property owned jointly between a husband and wife, are also exempt. Like other state, most charitable organizations and government entities are also exempt from any inheritance taxes.
All other beneficiaries fall into one of the a following classes: Class A, Class A1, and Class B.
Class A includes lineal descendants, meaning children, their descendants (whether or not they have been adopted by others) and step-descendants. In addition, Class A also includes parents and grandparents, the spouse of a child, or the surviving spouse if a child is deceased (as long as he or she has not remarried).
Class A1 includes brothers, half-brothers, sisters, half-sisters, and any person having at least one parent in common with the decedent (either by blood or adoption).
Class B includes all other beneficiaries.
The following table outlines the inheritance tax rates for Class A, A1, and B beneficiaries:
|Relation to Deceased:||Beneficiary Class:||Exemption Amount:||Tax Rate:|
|Descendants, step-descendants, parents, grandparents, spouse of a child, or surviving spouse of a deceased child||A||$3,500||4.5%|
|Brothers, half-brothers, sisters, half-sisters, or any person having at least 1 parent in common with decedent||A1||$0||12%|
|All other beneficiaries||B||$0||15%|
If your heir will owe inheritance taxes, these taxes are due within nine calendar months of your passing. If the inheritance tax is paid within three months of the date of death, Pennsylvania applies a 5% discount.
If the deceased had a life insurance policy, the death benefit is exempt from the state inheritance tax, regardless of who the death benefit is paid to. Similar to Iowa, you can reduce or avoid any estate tax liabilities by purchasing a permanent life insurance policy. Your beneficiary will not be subject to inheritance taxes in Pennsylvania.
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No matter what state you live in, we can help! Most importantly, our shopping services are free, and there is no cost to apply. We specialize with helping clients who are in less than perfect health, and we have thousands of affordable, permanent, life insurance options available.
Give us a call today toll free at 855-247-9555 to speak with a licensed agent, or you can request a free quote below. In less than a minute our website will compare rates from dozens of insurers to help you find your best option.
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