A New Jersey woman wanted to leave $75,000 to each of her four siblings in her estate plan. She didn’t realize that the gift would trigger thousands of dollars in inheritance taxes for her beneficiaries.
As of 2026, New Jersey is one of five states—the others are Kentucky, Maryland, Nebraska and Pennsylvania—that impose inheritance taxes. A sixth state, Iowa, eliminated its inheritance tax in 2025. There is no federal inheritance tax.
Inheritance taxes are poorly understood, likely due to their relative rarity. We asked estate-planning attorney Martin Shenkman for details.
What Is Inheritance Tax?
An inheritance tax is similar to an estate tax but with a twist—estate taxes are paid by the estate of the deceased…inheritance taxes are paid by the beneficiaries.
This can be confusing. While the beneficiaries pay inheritance taxes, the deceased’s state of residence—or, occasionally, the state in which the inherited property is located—determines whether inheritance taxes are due.
Example: If a resident of Pennsylvania leaves money to a friend who lives in Ohio, that Ohio friend probably will have to pay inheritance taxes even though he lives in a non-inheritance-tax state. But if an Ohio resident leaves money to a Pennsylvania resident, the Pennsylvania resident won’t owe inheritance taxes even though she lives in a state that imposes this tax.
Also: Beneficiaries sometimes must file tax returns in states where they don’t live to pay those states’ inheritance taxes.
Good news: Small inheritances and/or inheritances received by close relatives often are exempted from inheritance taxes, though the rules vary from state by state…
Kentucky: The deceased’s spouse, children, grandchildren, parents and siblings—including half-siblings—all are exempt from Kentucky’s inheritance taxes. Certain other relations qualify for a $1,000 exemption, after which a tax rate of 4% to 16% applies. Non-relatives and cousins qualify for a $500 exemption, after which a rate of 6% to 16% applies.
Maryland: The deceased’s spouse/registered domestic partner, children including stepchildren, grandchildren, great-grandchildren, parents, grandparents, siblings, and sons- and daughters-in-law are exempt in Maryland. In addition, transfers to any one recipient not exceeding $1,000 are exempt regardless of relationship, and certain property administered under Maryland’s Small Estate procedures is exempt. Inheritances that aren’t exempt are subject to a 10% tax.
Nebraska: The deceased’s spouse is exempt in Nebraska, as are charities and all recipients age 21 or younger. Other close relatives including parents, grandparents, siblings, children, grandchildren and additional “lineal descendants” and in-laws receive a $100,000 exemption, with a tax rate of just 1% above that. Certain other relatives including aunts, uncles, nieces and nephews receive a $40,000 exemption, then a tax rate of 11%. Beneficiaries that don’t fall into the categories described above receive a $25,000 exemption followed by a 15% rate.
New Jersey: The deceased’s spouse, children, grandchildren, parents and grandparents are exempt in New Jersey, as are charitable organizations. Siblings and certain other relatives receive a $25,000 exemption followed by a tax rate of 11% to 16%. Other beneficiaries face a rate of 15% to 16% on their entire inheritances.
Pennsylvania: The deceased’s spouse is exempt in Pennsylvania, as are parents receiving inheritances from their children who are age 21 or younger. Direct descendants and “lineal heirs” face a 4.5% inheritance tax rate…siblings, a 12% tax rate…and most others, a 15% tax rate. Inheritances of certain agricultural properties are exempt.
Six Strategies for Controlling Tax on Inheritance
Heirs might have to pay inheritance taxes, but the people leaving the bequests might be able to take steps to prevent those heirs from facing taxes. Options include…
1. Gift money before you die
Rather than leave a taxable inheritance to an heir, you could make the gift while you’re still alive. As of 2026, you can give as much as $19,000 per year per recipient without federal gift tax consequences. Larger gifts would count against your lifetime gift-tax exemption, which is $15 million as of 2026, but wouldn’t necessarily generate a tax bill, either. For most people, that means they needn’t worry about any federal tax, so if they don’t need the money they may opt to gift more and early to avoid inheritance tax.
Downside: Making large gifts while still alive is prudent only if you’re very confident that you won’t need the money to pay your own bills during your lifetime. Also be aware that states that impose inheritance taxes often have “look back” periods—if you die within a predetermined amount of time after making a gift, potentially three years, that gift might be treated as an inheritance and taxed accordingly.
2. Purchase a life insurance policy that names the heir as beneficiary
Life insurance death benefits are not typically subject to inheritance taxes.
Downside: This is an expensive solution—insurance premiums can be pricey. “In my opinion,” says Shenkman, “this option may make sense only for people who were planning to purchase life insurance policies for other reasons as well.”
3. “Gross up” bequests
If some of your heirs will face inheritance taxes but others won’t and your goal is to treat them equally, you could increase the gross amount you give to the heirs who’ll be taxed so that the net amount they end up with after taxes equals the amount you give the heirs who aren’t taxed. Include language in your estate plan explaining why the taxed heirs are receiving more so that untaxed heirs don’t feel slighted. This strategy can make sense for someone whose heirs include both his children and people he thinks of as his children even though they technically aren’t. “Family structures have changed dramatically in recent decades,” says Shenkman. “The person someone considers ‘my child’ might not legally be their child.”
Downside: This strategy does nothing to reduce inheritance taxes—it simply takes them into account so heirs are treated equally.
4. Place the assets that will pass to an heir affected by inheritance taxes into an irrevocable trust.
The heir would be named trust beneficiary. Assets placed in this trust will be out of your estate and thus should not be subject to inheritance taxes. The trust also could protect the assets if you were sued or divorce.
Downside: You’ll lose control over the assets as soon as you place them into the trust. Also, setting up a trust is likely to generate low-to-mid-four-figure legal bills…and the look-back periods mentioned above could apply.
5. Place the assets into an irrevocable trust—but name your spouse (or your most trusted child) as the initial beneficiary
Give this initial beneficiary “limited power of appointment,” and include language in the trust that upon your death switches the trust’s beneficiary to the individual(s) who you wish to inherit the assets without facing inheritance taxes. This strategy offers greater flexibility than the simpler trust described above—if you wish to make adjustments after the assets are placed in the trust, your initial beneficiary can do so on your behalf.
Downside: Your initial beneficiary will have control over the assets and could, in theory, use them for purposes you didn’t have in mind. As above, setting up this trust is likely to cost low-to-mid four figures, and look-back periods could apply.
6. Place the assets into a “non-grantor” trust
This type of trust is more complex than the ones described earlier, but it could have tax advantages not only for your heirs but for you as well. Example: A Pennsylvania woman wants to leave $60,000 apiece to each of four siblings. She places the necessary $240,000 into a non-grantor trust, then the trust invests that money in safe investments likely to generate annual returns in the neighborhood of 5%—that would come to around $12,000 in investment profits per year. Those profits are donated annually to the charity of her choice. This woman doesn’t itemize her taxes, so typically she can’t deduct her charitable donations, but by making those donations through this trust she essentially can do so.
Downside: This strategy delivers financial upside only for people who intended to make large charitable donations anyway. Setting up this sort of trust can cost mid-to-high four figures, which is more than the simpler trusts described earlier—but the tax deductions it generates have the potential to more than cover those costs within a few years. As with the other trusts described here, look-back periods could apply.
