Legal Definitions - inheritance tax

An inheritance tax is a state-level tax that a person must pay when they receive money, property, or other assets from the estate of someone who has passed away. Unlike an estate tax, which is paid by the deceased person's estate before assets are distributed, an inheritance tax is levied directly on the beneficiary—the individual who receives the inheritance.

Only a handful of U.S. states currently impose an inheritance tax, and the specific rules, tax rates, and exemptions vary significantly from one state to another. Generally, many states exempt immediate family members, such as spouses and children, from paying this tax. However, more distant relatives or non-family beneficiaries are typically subject to the tax, often at different rates depending on their relationship to the deceased and the value of the inheritance they receive.

• Example 1: Immediate Family Exemption

  Sarah lives in Kentucky, a state that imposes an inheritance tax. When her mother passes away, Sarah inherits her mother's house, valued at $300,000. Under Kentucky law, direct descendants like children are exempt from paying inheritance tax. Therefore, Sarah receives the house without having to pay any state inheritance tax on it.

  This example illustrates how states often provide exemptions for immediate family members, meaning they do not owe inheritance tax on assets received from a parent.

• Example 2: Distant Relative Subject to Tax

  Mark resides in Pennsylvania, another state with an inheritance tax. His beloved aunt, who had no children of her own, leaves him $100,000 in her will. Pennsylvania law specifies that nieces and nephews are subject to inheritance tax at a particular rate. As a result, Mark must pay a portion of his $100,000 inheritance to the state of Pennsylvania.

  This demonstrates that inheritance tax is directly paid by the beneficiary, especially when the recipient is a more distant relative who does not qualify for an exemption.

• Example 3: Varying Rates for Different Beneficiaries

  In Nebraska, a state with an inheritance tax, Mr. Henderson passes away. He leaves $55,000 to his brother, David, and $25,000 to his close friend, Emily. Nebraska's inheritance tax structure applies different rates based on the beneficiary's relationship to the deceased. David, as a sibling, might pay a lower percentage of tax on his inheritance, or benefit from a higher exemption threshold, compared to Emily, who as a non-relative, would likely face a higher tax rate on her inherited amount.

  This example highlights how inheritance tax rates and applicable exemptions can vary significantly depending on the beneficiary's relationship to the deceased and the specific state's tax laws, leading to different tax burdens for different recipients from the same estate.