State Estate/Inheritance Tax
Beyond the federal estate tax — which exempts $15 million per person in 2026 after the One Big Beautiful Bill Act (Pub. L. 119-21) made that level permanent — 17 jurisdictions (12 states plus D.C. for estate taxes; 6 states for inheritance taxes; Maryland for both) impose their own death taxes that can significantly affect estate planning, especially for residents of high-tax states who die with assets well below the federal threshold. The critical difference: state estate taxes apply based on the size of the decedent's estate (paid by the estate before distribution), while inheritance taxes are imposed on the recipients and vary by their relationship to the decedent (typically exempting surviving spouses and often children). State exemptions vary dramatically: Connecticut recently matched the federal exemption at $15 million; Oregon exempts only $1 million and Massachusetts only $2 million — meaning estates well below the federal threshold still owe state tax. Maryland's top rate is 16%; Washington State's top rate is 20% — the highest state estate tax rate in the country. For estate planning purposes, the interplay between federal and state death taxes is critical: the unlimited marital deduction (assets passing to a surviving spouse are exempt from both federal and state estate tax) remains the most important first-line planning tool. States with inheritance taxes — Iowa (phasing out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — impose taxes on heirs receiving assets, with rates and exemptions depending on the relationship between heir and decedent (spouses are uniformly exempt; siblings and more distant relatives face higher rates). Residency planning — and the careful titling of real property — is a major consideration for high-net-worth individuals with multistate connections.
Current Law (2026)
12 states plus D.C. impose estate taxes, often with exemptions far below the federal estate tax exemption. 6 states impose inheritance taxes. Maryland imposes both.
State Estate Taxes
| State | Exemption | Top Rate |
|---|---|---|
| CT | $15M | 12% |
| DC | $4.71M | 16% |
| HI | $5.49M | 20% |
| IL | $4M | 16% |
| ME | $6.8M | 12% |
| MD | $5M | 16% |
| MA | $2M | 16% |
| MN | $3M | 16% |
| NY | $7.35M | 16% (cliff: if >105% of exemption, full estate is taxed) |
| OR | $1M | 16% |
| RI | $1.77M | 16% |
| VT | $5M | 16% |
| WA | $2.193M | 20% |
State Inheritance Taxes
| State | Exempt Transfers | Rate Range |
|---|---|---|
| IA | Phasing out (repealed 2025) | 0% |
| KY | Spouse, children, parents exempt | 4-16% |
| MD | Spouse, children, parents exempt | 10% flat |
| NE | Spouse exempt | 1-18% |
| NJ | Spouse, children, parents exempt | 11-16% |
| PA | Spouse exempt, children 4.5% | 4.5-15% |
How It Works
Estate taxes are levied on the total estate before assets are distributed to heirs — paid out of the estate itself, which reduces what beneficiaries ultimately receive. Most states with an estate tax allow a deduction for any federal estate tax paid on the same assets, preventing a full stack of state tax on top of a federal bill. Inheritance taxes work differently: they're imposed on each recipient based on the amount received and their relationship to the decedent. Spouses are uniformly exempt from inheritance tax in every state that imposes one; children typically receive favorable rates; unrelated individuals pay the highest rates. Maryland imposes both an estate tax and an inheritance tax, making it among the most demanding states for death-tax planning. The six inheritance tax states — Iowa (phasing out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — vary significantly in which relatives receive exemptions.
Unlike the federal estate tax, which allows a surviving spouse to inherit the deceased spouse's unused exemption through portability, state estate taxes in nearly every state — Connecticut is the notable exception after it matched the federal framework — do not allow portability. For a married couple in Oregon (with its $1 million state exemption), the first death can trigger state estate tax on assets that pass directly to the surviving spouse or children if not properly structured. Standard first-death planning often uses a credit shelter trust (bypass trust) to capture the first spouse's state exemption rather than losing it.
New York's estate tax cliff is the most dramatic state-specific planning constraint: if an estate exceeds 105% of the state exemption ($7.72 million in 2026), the cliff triggers and the entire estate becomes taxable — not just the excess above the exemption. An estate worth $7.8 million can owe significantly more New York estate tax than an estate worth $7.3 million. Gifts made within three years of death are pulled back into the taxable estate under New York law, limiting last-minute planning options. High-net-worth New Yorkers in the $6.5–$8.5 million net worth range need to monitor this threshold carefully, as appreciation can push estates into cliff territory unexpectedly.
How It Affects You
If you live in Massachusetts or Oregon — or own property there: With exemptions of $2M (MA) and $1M (OR), these states impose estate tax on estates that comfortably avoid federal tax (federal exemption: $15M per person in 2026). A $3M Massachusetts estate owes zero federal estate tax but owes approximately $138,000 in Massachusetts estate tax. An Oregon estate of $2M owes approximately $100,000 in state estate tax. In both states, the tax rate starts at 8-10% on amounts above the exemption and rises to 16%. If your estate — counting home equity, retirement accounts you own, life insurance death benefits paid to your estate, and investment accounts — might approach these thresholds, state estate planning is distinct from (and in addition to) federal planning.
If you own real estate in New York: New York's estate tax has a notorious "cliff" — if your estate exceeds 105% of the $7.35M exemption (approximately $7.72M), the entire estate is taxed, not just the amount above the exemption. This creates a situation where a $7.5M New York estate could owe more in state estate tax than a $7.2M estate. The effective marginal tax rate in the range just above the cliff can exceed 100% on the last dollar. This makes the NY exemption a hard threshold that must be managed carefully through gifting strategies, life insurance planning, and trust structures — not merely a soft boundary. An estate of $8M in New York would owe approximately $400,000 in state tax on the excess above the threshold.
If you're inheriting assets from a Pennsylvania, New Jersey, or Nebraska estate: These states impose inheritance tax on recipients rather than on the estate itself — and the rate depends on your relationship to the deceased. Pennsylvania charges 4.5% on transfers to children and lineal descendants, 12% to siblings, and 15% to other heirs (spouses are exempt). New Jersey charges 11-16% on transfers to non-immediate family. Nebraska charges 1% for close relatives up to 18% for remote heirs. These taxes are owed regardless of your state of residence if the deceased was domiciled in one of these states, and regardless of the federal estate tax position. If you're named in a will from someone in these states, budget for an inheritance tax bill.
If you live in a high-estate-tax state and are planning your domicile: Changing domicile from a state with estate or inheritance tax (MA, NY, OR, WA, MN, IL) to a no-tax state (FL, TX, NV, WY, etc.) before death can permanently eliminate the state death tax exposure. Florida and Texas have no estate, inheritance, or income tax — and both have strong homestead and asset protection laws that make them natural destinations for domicile changes. Like the similar strategy for capital gains (see State Capital Gains Treatment), domicile change must be genuine — a real home, new driver's license, voter registration, changed professional and medical relationships. A poorly documented domicile change by a high-net-worth decedent will be challenged by the prior state's department of revenue.
Implementing Regulations
State estate and inheritance taxes are governed by state law. No federal CFR applies directly. 26 CFR Part 20 governs the federal estate tax, which interacts with state estate tax credits and deductions that states may reference in setting their own rules.
Pending Legislation
- Exemption changes: States regularly adjust exemptions. Watch for increases (to match federal) or decreases (for revenue).
- Inheritance tax repeal: Iowa has phased out its inheritance tax. Other states may follow.
Recent Developments
- Iowa inheritance tax fully repealed as of 2025: Iowa phased out and fully eliminated its inheritance tax effective January 1, 2025. Iowa joins the growing list of states that have repealed inheritance taxes in recent years. The remaining inheritance tax states are KY, MD, NE, NJ, and PA. If you've inherited assets from an Iowa decedent, confirm the current repeal date applies to your situation.
- Federal-state gap remains the real planning issue: The 2026 federal estate tax exclusion is now $15 million per person, while many state exemptions remain far lower. That means estates can still avoid federal estate tax while owing substantial state estate tax in places like Massachusetts, Oregon, New York, Washington, or D.C.
- Connecticut remains aligned with the federal exemption: Connecticut's exemption continues to track the federal exclusion amount, so in 2026 it is roughly $15 million. That makes Connecticut an outlier among state estate-tax jurisdictions.
- New York "cliff" remains — a critical planning hazard: New York's estate tax cliff (if the estate exceeds 105% of the $7.35M exemption, the ENTIRE estate is taxed) remains one of the most punitive provisions in state estate tax law. A $7.5M NY estate faces state estate tax on the full $7.5M, not just the amount above the exemption — creating a marginal rate that can exceed 100% in the range just above the threshold. Credit shelter trusts and careful liquidity planning are essential for NY decedents in this range.