Estate Planning
The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the federal estate tax lifetime exemption from prior levels, but that provision will sunset this year if Congress doesn’t act to extend it. (For more on the TCJA sunset, click here.) While the federal exemption is making headlines, the rules in your state of residence could be a larger concern for you and your heirs if you live in a state that charges estate or inheritance taxes.
State-level estate and inheritance taxes often have lower exemption thresholds that catch you by surprise. Home equity, life insurance policies in your name and taxable portfolio assets can add up fast. This could significantly reduce what your heirs receive, even if your estate falls well below federal limits. As of tax-year 2025, 16 states and the District of Columbia have estate or inheritance taxes (see table below).
Understanding the Difference: Estate vs. Inheritance Taxes
Estate tax is levied on the deceased’s estate before assets are distributed. The estate itself pays the tax. This is imposed by the federal government and some states.
Inheritance tax is paid by the beneficiaries who receive the inheritance. Certain family members are often exempt or pay reduced rates. There is no federal inheritance tax.
States with Estate and Inheritance Taxed (2025)
| State | Type of Tax | 2025 Exemption | 2025 Top Tax Rate | Notes |
|---|---|---|---|---|
| Connecticut | Estate Tax | $13,990,000 | 12% | Estate tax capped at $15 million. Also collects state gift tax (unified with estate tax). |
| District of Columbia | Estate Tax | $4,873,200 | 16% | |
| Hawaii | Estate Tax | $5,490,000 | 16% | |
| Illinois | Estate Tax | $4,000,000 | 16% | Prior taxable gifts includable in the estate. |
| Kentucky | Inheritance Tax | $500–$1,000 | 16% | Inheritance tax applies on transfers to anyone other than spouse, parents, children, grandchildren and siblings. |
| Maine | Estate Tax | $7,000,000 | 12% | Taxable gifts made within one year of death are includable. |
| Maryland | Estate Tax & Inheritance Tax | $5,000,000 (Estate) / $1,000 (Inheritance) | 16% (Estate) / 10% (Inheritance) | Exemption not indexed for inflation. Allows portability of unused spousal exemption. |
| Massachusetts | Estate Tax | $2,000,000 | 16% | Taxable gifts used to determine filing obligation. |
| Minnesota | Estate Tax | $3,000,000 | 16% | Taxable gifts made within three years of death are includable. |
| Nebraska | Inheritance Tax | $100,000 for close relatives; $25,000–$40,000 for remote relatives | 15% | Close relatives only pay 1%. |
| New Jersey | Inheritance Tax | $25,000 | 16% | |
| New York | Estate Tax | $7,160,000 | 16% | "Cliff tax"—if estate value exceeds 105% of exemption, the exemption is not available. |
| Oregon | Estate Tax | $1,000,000 | 16% | |
| Pennsylvania | Inheritance Tax | None | 15% | Lower rates charged to spouses, children, grandchildren, siblings and other relatives. |
| Rhode Island | Estate Tax | $1,802,431 | 16% | Exemption adjusted annually for inflation. |
| Vermont | Estate Tax | $5,000,000 | 16% | Taxable gifts made within two years of death are includable. |
| Washington | Estate Tax | $2,193,000 | 20% | Exemption adjusted for inflation annually. |
Source: Tax Foundation
Why State Estate and Inheritance Taxes Matter
These state-level taxes can have a significant impact for several reasons:
- Much lower exemptions:
While the federal exemption is $13.99 million in 2025 (double that for married couples), individual state exemptions can be as low as $1 million. Note that unlike with federal taxes, a deceased spouse’s exemption does not transfer to the surviving spouse (known as portability) at the state level.
- Cross-state complications:
Owning property in a state that imposes these taxes can trigger liability even if you reside in an estate-tax-free state.
- Tax stacking:
In states like Maryland, both estate and inheritance taxes may apply.
According to the Tax Policy Center, state and local governments collected $6.7 billion from these taxes in 2021, making them a sizable revenue source for the states that have them. In other words, states that charge them have a financial incentive to continue doing so.
How To Plan Strategically
- Consider Domicile and Residency
Your state of domicile, or where you have your permanent home, determines which state’s estate tax laws apply. Moving to a state without these taxes can yield significant savings.
Key actions to establish domicile include:
- Being physically present for a majority of the year
- Obtaining a driver’s license and registering to vote in the state
- Filing resident tax returns
- Moving important personal possessions
States losing wealthy residents may aggressively audit domicile claims, so make sure your documents are in order to avoid complications down the road.
- Consider Lifetime Gifting
Unlike the federal government, most states don’t impose gift taxes (Connecticut is the exception). This creates an opportunity to reduce your taxable estate through:
- Annual exclusion gifts ($19,000 per recipient in 2025)
- Direct payments for educational or medical expenses
- Gifts to irrevocable trusts
Beware of “clawback” provisions in states like New York, Maine and Minnesota, which can add back recent gifts to your taxable estate.
- Leverage Spousal Planning
For married couples, special planning is important. At the federal level, if one spouse doesn’t use their full exemption, the surviving spouse can use what’s left (this is called portability). However, most states don’t allow this sharing between spouses—only Hawaii and Maryland do. For this reason, it can be a good idea to review how your assets as a married couple are titled and potentially transfer assets from one spouse to another to ensure the state estate tax exemption is utilized.
Some couples employ special trusts (called credit shelter trusts) to ensure both spouses fully use their state exemptions. Under current tax law, any money left inside the credit shelter trust after the second spouse’s passing will not be subject to estate taxes, so the goal is typically to leave it untouched for as long as possible. Some states also allow special arrangements (called QTIP elections) that can help married couples minimize both federal and state taxes.
- Review Life Insurance
When properly structured through an irrevocable life insurance trust (ILIT), life insurance proceeds can provide a source of funds to pay estate taxes without adding to the taxable estate.
This strategy is particularly valuable for:
- Illiquid estates with significant real estate or business interests
- Properties in high-tax states that heirs wish to retain
- Address Real Estate Challenges
Real estate is taxed in the state where it’s located, regardless of your domicile. Consider:
- Transferring property to an LLC
- Making installment sales to family members or trusts
- Creating qualified personal residence trusts
Be Prepared
While federal estate tax affects relatively few Americans, state estate and inheritance taxes impact many more families with moderate wealth. With exemptions as low as $1 million in some states, even homeowners in high-value markets may face significant exposure based on the assessed value of their home.
If you live in or own property in a state that charges estate or inheritance taxes (or are considering moving to one), talk to your team so we can help you to consider this additional tax liability in your plan.
The information set forth in this communication is presented by RWA Wealth Partners, LLC (“RWA”). The contents are for informational and educational purposes only and are not intended as investment, legal or tax advice. Please consult with your investment, legal or tax advisor concerning any specific questions you may have. Past results are not indicative of future performance. The historical return of markets generally and of individual asset classes or individual securities may not be an accurate predictor of future returns of those markets, asset classes or individual securities. RWA does not guarantee the accuracy and completeness of any sourced data in this communication.
