The Hidden Tax Trap: State-Level Estate and Inheritance Taxes in America
Estate planning often conjures images of complex legal documents and difficult family conversations—but one of the most overlooked aspects is the tax landscape that awaits heirs after death. While much attention is paid to the federal estate tax, the reality is that far more individuals are likely to encounter estate or inheritance taxes at the state level. In fact, the federal estate tax applies only to estates exceeding $15 million effective January 1, 2026, affecting a tiny fraction of the population — less than 0.1% of all estates nationwide. By contrast, several states impose their own estate or inheritance taxes with significantly lower thresholds, meaning a much broader swath of families could face unexpected tax liabilities.
As of this writing sixteen U.S. states and the District of Columbia, representing about 25% of the U.S. population, impose either an estate tax, an inheritance tax or both.
1 Hawaii and Maryland allow a surviving spouse to assume the decedent spouse's unused state exemption with an election on a timely filed state estate tax return.
2 Nebraska inheritance tax rate for a child under the age of 22 is 0%. For children 22 and older, the inheritance tax rate is 1%.
3 Pennsylvania inheritance tax rate for a child aged 21 or younger is 0%. For children over age 21, the inheritance tax rate is 4.5%.
Each state approaches estate and inheritance taxes separately, with varying estate tax rates and exemptions, unique inheritance tax rates for children or non-children, and differing portability and exclusion options. Whether you're a financial advisor, an estate planning attorney or simply someone trying to protect your family's small business or legacy, understanding the state-specific rules is essential to crafting a plan that preserves wealth across generations.
How many people will be affected?
To give you an idea of just how many individuals, families and small businesses may be adversely affected by these often overlooked taxes, here are some facts and estimates.
Over the past few decades, the number of millionaires in the U.S. has dramatically increased — from just 500,000 in 1980 to over 23 million currently. That's about 7% of the population. Much of this growth is tied to inflation, which has driven up the value of assets like real estate, pushing more individuals past the million-dollar net worth threshold.
Over the next 20 years, let's estimate how many families might be subject to state estate or inheritance taxes in the U.S., based on current laws, demographics, and projected changes.
Assumptions
- Annual US deaths: 3 million, expected to rise to 3.5 million by 2045
- States with estate/inheritance taxes: 16 states and D.C.
- Population in taxed states: 25% of US population.
- Taxable estates/inheritances: Estimated 2 - 5% of deaths in taxed states result in liability.
Projected Impact (2025 - 2045)
- Total deaths: 65 million
- Deaths in taxed states: 16.25 million
- Families affected: 325,000 to 812,000 families
This range reflects both estate and inheritance tax exposure, assuming current exemption thresholds and demographic trends hold.
What Could Shift This?
- State-level changes: Some states may repeal or introduce new taxes.
- Wealth concentration: Rising asset values.
Impact on Small Businesses
Small businesses are particularly vulnerable to the effect of state estate and inheritance taxes. Many small businesses are illiquid, making it difficult for the heirs to pay taxes without selling assets or the business itself.
And while Section 6166 of the IRS Code allows deferral of federal estate taxes for closely held businesses, states with their own estate or inheritance taxes have different rules for extending payment or offer no deferral at all:
- Immediate payment required: Some states require the entire state estate tax to be paid up front, nine months after the date of death, even if the estate qualifies for a federal Section 6166 deferral.
- State-specific deferral plans: Other states offer their own installment plans, which may or may not be similar to the federal one. These plans have their own application procedures, eligibility rules, and interest rates. For example, Oregon allows extensions for paying its estate transfer tax, secured with acceptable collateral, under "reasonable cause" criteria.
Takeaways
- Early planning: Especially for clients in taxed states or with growing estates. Remember, state estate and inheritance taxes apply to all individuals over a certain threshold, including high net worth taxpayers with estate values above the federal exemption limits.
- Trust structures, life insurance and gifting strategies: To mitigate exposure and preserve wealth, or to continue the family business uninterrupted for future generations.
- Monitoring legislative updates: Federal and State tax laws are not static. Your client will appreciate your keeping them informed and prepared for changes in the tax landscape.
One of the key solutions to the potential attrition in estate values due to federal and state taxes is life insurance. Your professional knowledge regarding life insurance and its tax-free death benefits offers your client a unique tool for funding estate taxes or passing wealth efficiently.
For married couples who may be vulnerable to estate taxes, Survivorship life insurance continues to be a flexible, affordable and effective element of wealth transfer planning. For two 50 year olds in good health, premiums for $2 million of survivorship lifetime coverage can be as little as $15,000 annually. For two 60 year olds, about $23,000 per year would provide that same $2 million. Windsor can help you find and design products from life insurance companies that are right for your client, regardless of age or amount.
All of this underscores the importance of thoughtful estate planning. It's not just about minimizing taxes — it's about ensuring your client's legacy is protected and their heirs are well cared for. Working as a team with your clients and their legal and tax professionals is key to navigating the complexities of estate taxes at every level.
Further Reading -
Prudential: "Meet the New Millionaires"
Prudential: "Transfer Tax Planning Case Study and Presentation"
NFP/Partners Financial: "2025 State Estate Tax and Inheritance Tax Chart"
Tax Foundation: "Estate and Inheritance Taxes by State"
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