If you have received an inheritance after a loved one has died, you may find yourself subject to an inheritance tax. This is a state tax that the beneficiary of an inheritance must pay. Unlike the federal estate tax, which is paid out of the estate, inheritance taxes are the sole responsibility of the beneficiary who receives property. Inheritance tax is calculated for each separate beneficiary, which means that each and every beneficiary is responsible for paying his or her own inheritance taxes on the property that they receive.
When you are creating and updating your estate plan, it is important to be aware of the fact that not all states use an inheritance tax. As recently as 2018, only six states imposed an inheritance tax, including Iowa, Nebraska, Kentucky, Pennsylvania, Maryland, and New Jersey. New Jersey and Maryland each use both inheritance and estate taxes.
The main difference between the inheritance tax and the estate tax is the person who is responsible to pay the tax. Estate taxes are paid by the estate, regardless of who has inherited the deceased person’s assets. The executor of the estate is responsible for filing one single estate tax return and for paying the estate tax out of the estate's funds. The estate tax is calculated based on the total value of the assets in the estate and must be paid before any distribution can be made to beneficiaries. Inheritance taxes are paid by individual beneficiaries after they have received property from an estate. Taxes always need to be considered during estate planning.