Death Taxes? But I’m Not Rich!

Estate and inheritance taxes, often referred to as “death taxes,” may apply to individuals leaving assets to family and friends upon their death. These assets may include real estate, bank accounts, investments, life insurance policies, businesses, and more. While the future of the federal estate tax threshold remains uncertain, the 2025 federal threshold applies to estates and lifetime taxable gifts exceeding $13.99 million dollars per individual or $27.98 million dollars for married couples.¹ That’s a generous exemption that shields the vast majority of estates from taxation. So, does that mean you don’t need to worry about death taxes?

Well...you might! What is lesser well known is that individual states can impose their own estate or inheritance taxes, often affecting estates far below the federal exemption threshold. It's important to understand the distinction between estate taxes and inheritance taxes.

Estate taxes are imposed on the total value of a deceased individual’s assets before they are distributed to an heir being a natural person(s).² These taxes are paid by the estate itself, not the recipients, and can reduce the amount beneficiaries ultimately inherit.

Inheritance taxes, on the other hand, are levied on the individuals (heirs) who receive assets from a decedent.³ The relationship between the heir and deceased plays a key role, as some heirs, such as spouses, may be exempt from these taxes.⁴ So, how do you know if state-level estate or inheritance taxes apply to you?

The good news is that only five states impose inheritance taxes in 2025: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.⁴ While the rules vary by state, tax rates often depend on the heir’s relationships to the decedent and the value of the inherited assets. Close relatives like spouses, children, and siblings often are exempt or subject to lower inheritance rates compared to distant relatives or unrelated individuals. Some states also offer exemptions for certain asset types or exclude a portion of the estate based on its value. For example, Kentucky provides an exemption of just $500, depending on the relationship to the decedent!

States that levy estate taxes are somewhat more common, with twelve States (and the District of Columbia) imposing them. These states include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.⁴ Maryland is unique in that it has both an estate tax and an inheritance tax – yikes! Among these, Oregon, Rhode Island, Massachusetts, and Washington have the lowest estate tax exemptions, ranging from $1 million to just over $2 million. In contrast, Connecticut offers the highest state exemption at $13.99 million, which mirrors the current federal limit.

While estate or inheritance taxes, whether federal or state, may be unavoidable for some, proper planning can help reduce their impact. Strategies might include gifting, paying taxes on tax-deferred accounts earlier than required, charitable giving, and more – the details of which are best left for a future article.

Coordinating your financial and estate plans is essential to minimizing or potentially avoiding these taxes. Contact your Apella Wealth financial advisor or estate attorney to review your exposure and explore appropriate planning strategies.

Sources:

1. Estate tax | Internal Revenue Service
2. Estate tax | Internal Revenue Service
3. Inheritance Tax: What It Is, How It's Calculated, and Who Pays It
4. States With Inheritance or Estate Taxes (2025 Guide) – Forbes Advisor

Disclosures:

Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

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