Estate Taxes Explained: Federal, State, Gift, and Inheritance
“Death taxes” is a phrase that causes a lot of needless worry, partly because most people lump several very different taxes into one scary-sounding bucket. In reality, there are three distinct taxes that can touch money as it passes from one generation to the next: the estate tax, the inheritance tax, and the gift tax. They work differently, they’re owed by different people, and – for the large majority of families – most of them never come due at all.
This guide untangles these three estate taxes, adds the one that truly matters most for everyday families (how inherited assets are taxed), and walks through what applies here in New Jersey. It’s the tax companion to our broader estate planning guide.
Key Takeaways
- The federal estate tax only applies to very large estates – $15 million per person ($30 million per couple) in 2026 under the One Big Beautiful Bill Act – so the vast majority of families never owe it.
- New Jersey repealed its estate tax in 2018 but still has an inheritance tax, which is paid based on the heir’s relationship to the deceased, not the size of the estate.
- The gift tax rarely bites: you can give $19,000 per person per year (2026) with no filing, and beyond that you draw against the same $15 million lifetime exemption shared with the estate tax.
- The tax most families actually feel is the income tax on inherited assets, especially inherited retirement accounts, although most other inherited property gets a valuable “step-up” in cost basis.
- Because these taxes interact, planning levers (gifting, trusts, beneficiary structure, charitable giving) work best coordinated with both a financial advisor and a tax professional.
The three transfer taxes –and who actually pays them
| Tax | Who pays it | Based on |
|---|---|---|
| Estate tax | The estate | The total value of what you leave—only above a very high exemption. |
| Inheritance tax | The heir | The heir's relationship to the deceased (a state-level tax). |
| Gift tax | The giver | Gifts above the annual exclusion—rarely results in an actual bill. |
| Income tax on inherited assets | The heir | Withdrawals from inherited retirement accounts (the one most families feel). |
Let’s start with the distinction that clears up most of the confusion: the estate tax is paid by the estate; the inheritance tax is paid by the heir; and the gift tax is paid by the giver. That’s three different taxes, three different payers, three different triggers. Add the income tax that can apply when you inherit certain assets, and you’ve covered essentially everything people mean by “death taxes.” Now we will take them one at a time.
Federal estate tax: real, but rare
The federal estate tax applies to the total value of what you leave behind, but only above a very high exemption. For 2026, the One Big Beautiful Bill Act set that exemption at $15 million per individual ($30 million for a married couple), indexed for inflation and made permanent, meaning it doesn’t carry the automatic sunset the prior law did. Above the exemption, the rate climbs to 40%.
The practical upshot: the overwhelming majority of families will never owe federal estate tax. If your net worth is approaching the $15 million mark – or you’re weighing large lifetime gifts to use the higher exemption – the planning math is worth running carefully. For most people, however, this is one tax to understand and then set aside.
State death taxes –and what New Jersey actually charges
| Class | Who's included | Tax |
|---|---|---|
| Class A | Spouses, civil-union partners, children, grandchildren, stepchildren, and parents | Exempt |
| Class C | Siblings, and sons- or daughters-in-law | 11–16% above $25,000 |
| Class D | Nieces, nephews, cousins, friends, unmarried partners, and most others | 15–16% |
| Class E | Qualified charities and similar organizations | Exempt |
Separate from the federal system, some states impose their own estate or inheritance taxes at far lower thresholds. Here’s the national picture: as of 2026, only five states levy an inheritance tax – Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania (Iowa finished phasing its out). A separate group of roughly a dozen states plus Washington, D.C. impose an estate tax. And one state, Maryland, charges both. In Maryland, the same dollars can face an estate tax and then an inheritance tax on the way to heirs. If you own property in, or might retire to, another state, it’s worth checking where it lands.
New Jersey is an important – and often misunderstood – case. The good news: New Jersey repealed its estate tax in 2018, ending one of the country’s more aggressive state estate taxes.
The catch is that New Jersey still has a separate inheritance tax, which works differently. It is based on the relationship between the deceased and each heir, not the size of the estate. Immediate family is exempt; more distant heirs are not. The classes break down like this:
• Class A (exempt): spouses, civil-union partners, children, grandchildren, stepchildren, and parents.
• Class C (11–16% above a $25,000 exemption): siblings, and sons-/daughters-in-law.
• Class D (15–16%): nieces, nephews, cousins, friends, unmarried partners, and most others.
• Class E (exempt): qualified charities and similar organizations.
So, if you plan to leave assets to anyone outside Class A – say a sibling, a niece or nephew, or a longtime partner – New Jersey inheritance tax planning genuinely matters. Our full breakdown is in The New Jersey Inheritance Tax.
The gift tax and the lifetime exemption
The gift tax exists so people can’t simply give everything away before death to dodge the estate tax, so the two are unified into one combined pool. In practice, it almost never results in a tax bill, thanks to two layers of protection.
The first layer is the annual exclusion: In 2026 you can give up to $19,000 per person, per year (a married couple can “split” gifts to give $38,000 per recipient) to as many people as you like, with no filing and no impact on your lifetime exemption. The second is the lifetime exemption: Gifts above the annual exclusion simply draw down the same $15 million exemption shared with the estate tax, so you still owe nothing until that entire pool is used up. Certain gifts are always free (tuition and medical bills paid directly to the institution, gifts to a U.S.-citizen spouse, and charitable gifts).
Used deliberately, gifting is a legitimate way to move wealth – and future appreciation – out of a taxable estate. The mechanics, exceptions, and 529 “front-loading” rules are covered in The Lifetime Gift Tax Exemption.
The tax most families actually feel: taxes on inherited assets
Here’s the one that touches far more households than the estate tax ever will – the income tax on what you inherit. Two rules matter most. For most property (a home, a brokerage account), heirs generally receive a step-up in cost basis to the value on the date of death, which can wipe out decades of unrealized capital gains – a significant benefit. Inherited retirement accounts are the exception: traditional IRA and 401(k) dollars are still taxable as ordinary income when withdrawn, and most non-spouse beneficiaries must now empty the account within 10 years under the SECURE Act.
What is a “step-up in basis,” exactly? Your cost basis is generally what the original owner paid for an asset, and capital-gains tax normally applies to the growth above that basis when the asset is sold. When you inherit an asset, its basis is “stepped up” to its fair-market value on the owner’s date of death. All the appreciation that built up during their lifetime is effectively erased for tax purposes. For example, if your father bought a stock for $20,000 and it was worth $100,000 when he passed, your basis becomes $100,000. If you sold it shortly after, you’d owe capital-gains tax on little or nothing rather than on $80,000 of gain. (Note that most retirement accounts don’t receive this step-up, which is why inherited IRAs and 401(k)s are treated differently.)
Understanding which assets get the step-up, which don’t, and how to time withdrawals can make a real difference for your heirs. We cover it in Do You Pay Taxes on an Inheritance?.
Planning levers (worth coordinating, not fearing)
Because these taxes interact, the most effective planning tends to combine a few tools rather than chase any single one: annual and lifetime gifting to shift assets (and their future growth) out of the estate; trusts to control timing and, in some cases, remove assets from the taxable estate; thoughtful beneficiary and account structure so the right assets pass the right way; and charitable strategies that can serve both your goals and your tax picture. None of these is one-size-fits-all, and the New Jersey inheritance-tax angle in particular rewards early planning. It is worth coordinating with both a financial advisor and a tax professional.
In sum: the taxes that touch an inheritance
For most families, the story is reassuring. The federal estate tax won’t apply, the gift tax won’t come due, and the biggest consideration is how inherited assets – especially retirement accounts – are taxed as income. Here in New Jersey, the wrinkle to watch is the inheritance tax on non-immediate-family heirs. Knowing which taxes actually apply to your situation is the first step; building a plan around them is the second.
Have questions about estate taxes or your broader plan? Schedule a FREE discovery call with one of our CFP® professionals – and, through our in-house tax team, we can look at the tax and planning sides together.
Reviewed for accuracy
Benjamin Stark, CFP®
Financial Advisor and Director of Client Experience at Vision Retirement, with 10+ years as a financial advisor.
Read full bio →FAQs
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No. New Jersey repealed its estate tax effective 2018. It does, however, still impose an inheritance tax on certain heirs based on their relationship to the deceased.
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An estate tax is paid by the estate before assets are distributed, based on the estate’s total value. An inheritance tax is paid by the individual heir who receives assets, based on their relationship to the deceased. New Jersey has the latter, not the former.
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In 2026 you can give up to $19,000 per person per year with no gift-tax filing and no effect on your lifetime exemption. Above that, you draw against the $15 million lifetime exemption—so you still won’t owe gift tax until that’s exhausted. See The Lifetime Gift Tax Exemption.
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It depends on the asset. Most inherited property gets a step-up in cost basis, often eliminating capital-gains tax. Inherited traditional retirement accounts are different – withdrawals are taxed as ordinary income. Details in Do You Pay Taxes on an Inheritance?.
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Almost certainly not, unless your estate approaches $15 million per person ($30 million per couple) in 2026. Above those thresholds, planning matters; below them, the federal estate tax generally isn’t a concern.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
