Inheritance Tax

What Does Inheritance Tax Mean?

An inheritance tax is a tax imposed on a person who inherits property or assets from a deceased individual. The amount of tax owed depends on the value of the property or assets received.

Insuranceopedia Explains Inheritance Tax

In the U.S., there is no federal law governing inheritance tax, making it primarily a matter regulated by individual states.

Six states impose inheritance tax laws, with exemptions for spouses and charitable organizations. Children generally face a low inheritance tax rate, while more distant relatives or unrelated heirs are taxed at higher rates.

Because state rules vary, people planning their estates often compare inheritance tax exposure against what an heir would receive through life insurance instead, where the question of whether life insurance proceeds are taxable usually has a more favorable answer.

The value of the inheritance also impacts the tax rate. For example, in New Jersey, an inheritance valued between $25,000 and $1.1 million would be subject to an 11% tax on the inheritance amount.

Heirs who receive a life insurance payout alongside inherited property should also know how life insurance beneficiary rules work, since the way a beneficiary is named affects whether the money becomes part of the taxable estate.