Estate Taxes 101

It is the tax that kicks into effect upon the death of a person while handing down their estate (which could be money or property).

However, it’s not always the case that the beneficiary of the property transfer has to pay an estate tax. If the value of the assets in question is below $11.4 million, then that constitutes an exemption by federal guidelines. Below, we’ll dive deeper into this topic in a bid to clarify estate taxes and what you can expect to pay before receiving your inheritance.

What are Estate Taxes?

Estate taxes are the taxes levied on a person’s estate before distribution to heirs of the estate.

The Details

Additionally, the exclusion mentioned above also applies in the scenario of a surviving spouse outrightly receiving the property. In some cases, if the property is shared (such as a home), and the surviving spouse will continue living in the home, they won’t pay an estate tax.

That said, here’s a more in-depth look at estate taxes in general: 

How Inheritance and Estate Taxes Differ From Other Taxes

You’ve likely heard both terms used interchangeably. However, there are some notable differences between the two.

Primarily, when it comes to estate taxes, the fee is obtained from the estate of the deceased. In other words, you won’t have to pay it after you’ve received an inheritance. However, heirs of the estate generally foot inheritance taxes out of the inheritance itself.

Further, the amount of inheritance tax hinges on the relationship between the deceased and the heir.

Distant relatives often incur the highest taxation in this regard, whereas the surviving spouses don’t pay anything at all in most states. Children are also in the latter bracket, but some states do inflict charges, albeit low fees. 

Below are two estate tax horror stories that no one should have to experience.


Awhile back, a beneficiaries mother passed away leaving behind a $2 million IRA she’d inherited from the beneficiaries late father.

This is where things get complicated.

When one spouse passes away the other typically receives the bulk of the estate tax-free. This is especially common when there is joint ownership of a home, or investment accounts.

As the only child, the beneficiary in question expected to be able to acquire the IRA through inheritance, just as her mother had done 5 years prior.

With an inherited IRA, the beneficiary is able to receive distributions slowly, over time to continue the tax-deferred growth on the account.

However, when the beneficiary discovered that the legal beneficiary on her mother’s IRA was her deceased father, no contingent beneficiaries were named.

The outcome:

The IRA is paid to the mother’s estate, rather than to her only living heir.

Unfortunately, an estate is not allowed to defer distributions under the inherited IRA rules. Consequently, she lost the ability to defer distribution and taxation. The entire $2 million IRA suddenly became taxable within five years of the mother’s death.



To avoid this, review beneficiary designation forms well in advance. This is a rare loophole that steals wealth from your living heirs and sends it back to the government. Reviewing these forms after a major life event will ensure that your IRA is passed down in a tax-advantageous way.



A couple’s combined net worth was $10.5 million.

$8.25 million of the estate was in the husband’s name, while $2.25 million of the estate was in the wife’s name.

The wife passes away suddenly, and her $2.25 million is entered into a trust fund – this process is often referred to as a credit shelter trust.

In this case, her assets in the trust are no longer considered a part of her living husband’s estate.

Under current law, however, a person whose net worth exceeds $5.25 million at their death must pay a 40 percent estate tax on anything over that $5.25 million.

When he dies a couple of years after his wife, his estate is exempt for the first $5.25 million. However, it is subject to a 40 percent tax on the remaining $3 million.

The outcome:

The couple’s descendants pay $1.2 million in taxes before they receive anything from the joint estate.



To avoid this kind of madness, the couple should make sure that both spouses have $5.25 million of assets in each of their names while living.

In that case, the wife dies and her trust receives $5.25 million. Then when the husband dies, his assets are also $5.25 million which makes the entire estate exempt from paying any estate tax.

Of course, this is circumstantial, and it would be better to be far below the legal limit of $5.25 million per person to avoid taxation.

Another way to avoid the $1.2 million payout to the government is through the application of the portability laws.

When she dies with only $2.25 million, she didn’t use all of her exemption. The remaining $3.0 million exemption goes to waste unless the husband opts to transfer or “port” the unused $3 million to himself.

In that case, his new total exemption becomes $8.25 million. When he dies, his exemption increases to $8.25 million and there will be no tax on his estate.

To benefit from these laws, he would have to file an estate tax return for her estate upon her death. This is not a requirement because her estate was moved into a credit shelter trust, however, the administrative costs of filing an estate tax are well worth it. This simple process yields $1.2 million in savings for the beneficiaries and heirs after he dies.

A look at estate tax across states

The U.S. states that collect an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. As things stand in 2019, inheritance tax is in place in only six states.

There is only one state that collects an inheritance tax, as well as the estate tax.

The state in question is Maryland.

The estate tax is exclusively in effect in the District of Columbia in addition to 13 states. It’s usually the case that a state’s exclusion amount is lower than the federal government threshold of $11.4 million.

Additional Exclusions

Further exclusions in the US are less significant. These exclusion figures are as follows across applicable states: 

  • In the District of Columbia, exclusion holds at $5.682 million.
  • Connecticut is $3.6 million respectively.
  • That amount is $1 million in Oregon and Massachusetts.
  • $5.49 million in Hawaii
  • $4 million in Illinois
  • $5.7 million in Maine
  • $5 million in Maryland

Meanwhile, for Minnesota, New York, and Rhode Island, exclusion amounts are $2.7 million, $5.74 million, and $1.562 million accordingly.

The amount is$2.75 million for the exclusion boundary in Vermont, and lastly, $2.193 million in the state of Washington.

Anything above the exclusion figure is what the US treasury taxes, rather than the value of the estate in its entirety.

Furthermore, federal – and state – exclusion thresholds change each year to reflect inflation, so be sure to check with your estate planner or financial advisor to prepare for any fees your beneficiaries will have to pay for well in advance.

Pointers to reducing estate taxes:

To keep tabs on the estate taxes you should expect to pay and to ease the burden on those you leave behind, you can do the following:

  • Estate gifts: It’s the norm across states that gifts don’t qualify for tax incentives, although there are amount limitations to consider.
  • Trust shielding: Legally, you can circumvent federal and state taxation on your estate via a bypass trust. However, this applies to a limited selection of assets. Inquire for more information on those limitations.
  • Charity: Property is not a part of the gross estate, as it is deductible when it goes to a qualifying charity. If your beneficiaries already own property, then giving away your homes to a qualifying charity may be of great benefit.

Lastly, you can avoid estate taxes and fees through relocation.

In some states, such as Florida for instance, the estate tax doesn’t apply within state jurisdiction. However, it kicks into effect at the federal level when the value of the estate surpasses the aforementioned $11.4 million.