How to minimize inheritance taxes

Death tax, inheritance tax, estate tax — while you might have heard these terms be used interchangeably, it is important to understand the differences to know what taxes might affect you. While both taxes are related to the transfer of wealth after someone dies, they differ in who pays the tax and how it’s applied.

What are estate taxes?

Estate tax, also known as the death tax, is a tax on the total value of a deceased person’s estate (including money, property, investments, businesses, etc.) that exceeds a certain threshold. Estate taxes are paid by the estate — the deceased person’s assets — before anything is distributed to heirs.

The federal government levies estate taxes; however, this only applies to large estates over $13.99 million.¹ If your estate exceeds $13.99 million, taxes can range from 18% to 40% depending on the size of your estate.

It is also important to note that many states levy their own estate taxes in addition to federal estate taxes and may have lower exemption thresholds.

What are inheritance taxes?

Inheritance tax is a tax on the value of assets inherited from someone who has died. Inheritance taxes are paid by the beneficiary — the person inheriting — after they have received the inheritance.

While there is no federal inheritance tax, some states can impose inheritance taxes. States that impose inheritance taxes include:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Iowa was previously on the list, but inheritance taxes no longer apply to deaths in 2025 or later.

Inheritance tax rates may vary depending on the heir’s relationship to the deceased. In general, closer relatives, such as spouses or children, may be exempt up to a certain threshold, while more distant heirs might face higher rates.

Before trying to figure out how to mitigate inheritance taxes, it is important to understand what taxes apply to your inheritance. The four main types of taxes on inheritances include estate and inheritance tax — covered above — as well as capital gains and income taxes. Understanding how each of these taxes affects your inheritance is key to reducing your inheritance taxes.

How capital gains tax applies to inherited assets

Capital gains tax is a federal tax imposed on the profit made from selling an asset, such as stocks, real estate, or collectibles. Some states may also levy capital gains taxes on top of the federal taxes.

When a beneficiary inherits an asset (i.e., stocks, property, mutual funds, etc.), capital gains tax does not apply immediately but rather when the inherited asset is sold. The cost basis of an inherited asset is generally “stepped up” to the fair market value on the date of death — or an alternative valuation date, if chosen by the estate.

For example, your grandparent bought a house for $100,000, but it was worth $500,000 when you inherited it. Soon after, you sell the house for $550,000. Your capital gain is only $50,000 because the cost basis was stepped up to $500,000 — meaning the $50,000 will be subject to capital gains taxes.

Essentially, no capital gain tax is owed at the time of inheritance, but rather later when the asset is sold. Long-term capital gains can be taxed at 0%, 15%, or 20% on the federal level and may vary depending on your taxable income for the year.

Income tax

In general, inheritances are not considered taxable income by the federal government and therefore do not need to be reported to the Internal Revenue Service (IRS), but exceptions apply.

If you inherit assets in pre-tax accounts — such as a traditional 401(k) or IRA — you may owe income taxes on any withdrawals if you are not a spousal beneficiary. Other assets, including annuities, savings bonds, or unpaid income, such as final wages, dividends, or payments owed to the deceased, may also be subject to income taxes.

While avoiding inheritance taxes might not be entirely possible, there are some methods that can help you minimize these taxes. Here are some strategies that might help you reduce estate and inheritance taxes if you have received an inheritance, are expecting to receive one, or simply want to tailor your estate plan to reduce tax liability for your heirs.

Create a trust

Setting up certain kinds of trusts, such as revocable or irrevocable trusts, can help to minimize estate taxes. Trusts allow you to avoid probate when passing assets to beneficiaries after your death, which can help mitigate expenses associated with state probate processes.

Revocable trusts allow guarantors to take assets out if necessary or modify their trust. Irrevocable trusts include grantors transferring ownership of assets to the trust, which removes all incidents of ownership and in turn removes the trust’s assets from the grantor’s taxable estate.

Additionally, a trust can also help give your family and loved ones more privacy during the estate settling process, so you might want to consider incorporating one into your estate plan.

Use a gifting strategy

If you have a large estate, you might want to consider gifting part of it during your lifetime. Gifting strategies can be a powerful way to reduce or avoid inheritance and estate taxes, because a large portion of gifts or estates are excluded from taxation.

By gradually transferring wealth during your lifetime, you may lower the value of your taxable estate and reduce potential tax burdens for your heirs. The annual gift tax exclusion allows you to gift up to $19,000 per person per year² without triggering gift taxes or using your lifetime estate tax exemption. These annual gifts can help reduce your estate without requiring any reporting, as long as you stay under the annual limit.

Make charitable donations

Making donations to charitable organizations can help you potentially minimize inheritance taxes. Charitable gifts are tax-deductible and are not considered taxable gifts. Using charitable gifting can help lower your estate tax burden or potentially offset taxes owed on an inheritance you’ve received.

Minimize pre-tax retirement account distributions

While pre-tax retirement accounts are not subject to inheritance tax, they can create an income tax burden when making withdrawals. To minimize these taxes, spouses can roll the account into their own IRA, delaying required minimum distributions (RMDs) and providing more flexibility.

Non-spouse beneficiaries, however, need to deplete inherited accounts within 10 years, so spreading withdrawals across lower-income years can help to reduce tax impact. Other RMD strategies, such as Roth conversions, can help you mitigate tax burdens from retirement account distributions.

If you are planning to leave an inheritance behind or have just received one, it is important to be aware of any tax implications and how you can minimize inheritance taxes overall. You might want to consider seeking advice from an estate planning attorney to help set up your estate in a way that minimizes taxes for your heirs and beneficiaries. If you have received an inheritance, a financial advisor or estate planning attorney can help you manage inheritance taxes based on your financial situation or guide you on what to do with your inheritance. You might want to consider different methods to manage your tax liability.

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1. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

2. https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025