6 States Where Inheritance Tax Catches Families Off Guard
Even if you think inheritance tax only applies to the ultra-wealthy, it might still catch your family off guard. Many people don’t realize that six U.S. states currently impose an inheritance tax, meaning heirs—not estates—may owe money based on how closely they’re related. If a loved one lived or owned property in one of these states, your inheritance could shrink unexpectedly. If you live in any of these states, you might want to read up on your local inheritance tax laws.
1. Kentucky
In Kentucky, the inheritance tax depends on your relationship with the decedent. Close relatives like children and parents are exempt, but siblings and more distant relatives may pay rates up to 16%. The exemption thresholds are limited, so non-immediate relatives can face tax even on modest inheritances. Most people assume spouses and children are always safe, but in Kentucky, only certain classes are excluded. If your loved one lived in Kentucky, that inheritance tax may surprise you without advance planning.
2. Maryland
Maryland is the only state with both a state estate tax and an inheritance tax. Heirs—except spouses—may face up to 10% inheritance tax, while the estate itself is also taxed up to 16% if above the exemption amount. That double exposure means families must carefully plan, especially for large estates. Many people don’t realize Maryland treats both the estate and the recipient separately. If you’re inheriting from someone in Maryland, you could owe on both sides—making advance planning even more critical.
3. Nebraska
Nebraska imposes an inheritance tax that varies based on proximity and amount inherited. Immediate family members have a generous exemption (up to $100,000 tax-free), but more distant relatives can owe rates up to 15% on modest amounts over thresholds starting as low as $25,000. That means if you’re not a direct descendant, even unexpected inheritances can be taxed heavily. The graduated rate structure makes inheritance tax planning more complex. Families may not realize how much heirs outside the immediate family can owe.
4. New Jersey
New Jersey’s inheritance tax hits everyone except spouses, parents, children, and grandchildren tax-free—in other words, only Class A heirs escape. Non-lineal heirs may pay from 11% to as much as 16% depending on the value received. Many people don’t know that New Jersey abolished its estate tax but still keeps the inheritance tax for some beneficiaries. If you inherit as a sibling or nephew in New Jersey, the tax bill can be steep. Good planning in advance can significantly reduce what these more distant heirs owe.
5. Pennsylvania
In Pennsylvania, inheritance tax is based strictly on relationship: spouses and minor children owe 0%, children over 21 and other direct descendants pay 4.5%, siblings 12%, and unrelated heirs up to 15%. There is no estate tax in Pennsylvania, but many families are surprised at how steep the inheritance tax can be for siblings or more distant beneficiaries. This tiered tax structure makes it critical to know who is inheriting what. Even residents of other states may owe inheritance tax if the decedent lived in Pennsylvania and owned property. Planning tools like trusts or gifting can help lessen the burden.
6. Iowa (Until Full Repeal in 2025)
Iowa currently imposes an inheritance tax, but the tax is being phased out—full repeal takes effect for deaths on or after January 1, 2025. That means heirs who inherit before that date may still owe based on the heir’s relationship and amount. While lineal relatives are largely exempt with high thresholds, more distant heirs pay tax. If someone died in early 2025, inheritance tax may still apply depending on the date of death. It’s a reminder that tax laws change—timing matters greatly when inheritance tax is at play.
What Smart Planning Looks Like Today
If someone close to you lives in one of these six states imposing an inheritance tax, it’s easy to get caught off guard. The inheritance tax often depends on the heir’s relationship and thresholds that aren’t obvious until the assets are transferred. Using trusts, lifetime gifts, or relocation strategies can help reduce or avoid tax exposure. Talking with an estate planner familiar with each state’s rules can protect families during emotionally difficult times. Planning ahead is often the difference between shielding assets and paying an unwelcome bill.
Did you or someone you know get hit with inheritance tax unexpectedly? Share your experience or questions below in the comments!
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