Estate Tax vs. Inheritance Tax: They’re Not the Same Thing
People use the terms estate tax and inheritance tax interchangeably. In reality, they are two very different taxes.
Understanding the distinction can help you better understand estate planning discussions and may even influence where you choose to live or retire.
The good news is that most Americans will never owe either tax. The challenge is that many people assume they are the same tax, or that neither one applies because their estate is below the federal estate tax exemption.
What Is an Inheritance Tax?
An inheritance tax is imposed on the person receiving the inheritance, not on the estate itself.
Whether tax is owed generally depends on the laws of the state involved, the beneficiary's relationship to the deceased, and in some cases the amount inherited.
Many states exempt spouses from inheritance tax, and some also exempt children or other close family members. More distant relatives or unrelated beneficiaries are more likely to owe tax where an inheritance tax applies.
In simple terms: The heir pays the tax.
Estate Tax vs. Inheritance Tax
The easiest way to remember the difference is:
• Estate tax is paid by the estate.
• Inheritance tax is paid by the beneficiary.
• Estate tax is calculated before assets are distributed.
• Inheritance tax is calculated after the inheritance is received.
• Estate tax is based on the value of the estate.
• Inheritance tax is based on the recipient and applicable state law.
• The federal government has an estate tax.
• There is no federal inheritance tax.
Why State Taxes Matter
Although many people focus on the federal estate tax, several states have established their own estate or inheritance tax systems.
Today, several states impose an estate tax, five states impose an inheritance tax, and Maryland is currently the only state that imposes both an estate tax and an inheritance tax.
Because every state sets its own exemption amounts and tax rates, a family may owe state tax even though no federal estate tax is due.
This is one reason estate planning should consider both federal and state tax laws.
A Washington Example:
For readers in Washington, this distinction is especially important.
Washington imposes a state estate tax, but it does NOT impose an inheritance tax.
Beginning July 1, 2026, Washington's estate tax exclusion increased to $3 million, substantially lower than the current federal estate tax exemption. As a result, some Washington estates may owe state estate tax even though no federal estate tax is due.
Why This Matters
Estate and inheritance taxes don't affect most families, but they can become important for individuals with appreciated real estate, family businesses, investment portfolios, retirement assets, or property located in multiple states.
Understanding which rules apply can help avoid surprises and may create planning opportunities through gifting, residency decisions, charitable planning, or other estate planning strategies.
The Bottom Line
Estate tax and inheritance tax are often confused because both apply after someone dies. However, they are fundamentally different taxes.
Remember the simple rule:
• Estate tax: The estate pays.
• Inheritance tax: The heir pays.
Knowing the difference is the first step toward understanding whether either tax may affect you or your family.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation. I offer a free initial consultation to discuss your tax planning questions and help you evaluate your options.