Who Pays Inheritance Tax on Gifts? + FAQs

In the United States, any tax due on a gift is generally paid by the person who gives the gift (the donor), while inheritance taxes—only imposed in a few states—are paid by the beneficiaries who receive an inheritance.

Did you know that only about 0.2% of U.S. estates end up owing federal estate tax, yet many Americans remain confused about taxes on gifts and inheritances? It’s easy to mix up gift taxes, estate taxes, and inheritance taxes, but understanding who actually pays in each case can save your family from costly surprises.

📜 Understand the different types of “death taxes,” including federal gift and estate taxes versus state inheritance taxes.
💰 Find out who is on the hook for taxes when giving or receiving a large gift, and when heirs must pay inheritance tax.
⚖️ Learn how federal rules and state laws differ, with real examples and even court cases that clarify tax responsibilities.
🚫 Discover common pitfalls and mistakes to avoid in estate planning – from unintended tax bills to loss of valuable tax benefits.
🎯 Explore smart strategies to minimize taxes, including gifting tactics, exemptions, and planning moves that protect your wealth for the next generation.

Quick Answer: Who Actually Pays Tax on Gifts and Inheritances?

“Who pays inheritance tax on gifts?” Under U.S. law, there is no single “inheritance tax on gifts” – instead, it depends on the type of transfer:

If it’s a lifetime gift: The giver (donor) is generally responsible for any federal gift tax. The recipient of a gift does not pay income tax or gift tax on what they receive. For example, if you give someone $50,000 as a gift, you as the donor might need to file a gift tax return (and potentially use some of your lifetime exemption), but the person receiving the $50,000 owes no tax on it.
If it’s an inheritance (assets received after someone’s death): The estate of the deceased person is responsible for any estate tax due at the federal level. Heirs receiving inheritances do not pay federal tax on what they inherit. However, a few states impose a separate inheritance tax on the beneficiaries themselves. In those states, the person who receives the inheritance might have to pay a state tax on the amount they inherit (typically this applies only if the heir is not a close relative, depending on state law).

In short, gift taxes are typically paid by the giver, and inheritance taxes (where they exist) are paid by the recipient. But as we’ll see, the specifics vary depending on federal vs. state laws and the timing and size of the gift or bequest.

Federal Law: Gift Tax and Estate Tax Basics

Let’s start with federal law, which applies nationwide. The U.S. federal government does not have a general “inheritance tax.” Instead, it has two main taxes on transfers of wealth:

Gift Tax: a tax on certain gifts made during someone’s life.
Estate Tax: a tax on the transfer of an estate’s assets after death.

These two are unified under a single system so that large gifts you make during life will count against your estate tax exemption at death. Here’s how each works and who pays:

Federal Gift Tax (Donor-Paid): If you give someone money or property while you’re alive, the IRS may impose a gift tax. Importantly, the donor – the person who gives the gift – is the one responsible for reporting and paying any gift tax, not the recipient. The person receiving a gift doesn’t pay income tax on it and won’t owe gift tax.

The giver might need to file a gift tax return (IRS Form 709) if the gift exceeds the annual exclusion amount. As of 2025, you can give up to $19,000 per person per year without even having to file a gift tax return. Any gift beyond that annual exclusion simply uses up part of your lifetime gift/estate tax exemption.

Example: Say you give your daughter $30,000 in 2025. The first $19,000 is free under the annual exclusion. The remaining $11,000 is a taxable gift – but you likely won’t owe any tax out of pocket. You would file a Form 709 to report that $11,000, which just gets subtracted from your lifetime exemption.

Only if your total lifetime gifts eventually exceed the multi-million-dollar exemption would you actually owe gift tax (at rates up to 40%). And crucially, your daughter pays nothing – no gift tax and no income tax on that $30,000 gift.

Lifetime Gift Tax Exemption: The federal tax system gives each person a very large lifetime exemption for gifts and estates combined. In 2025, this unified exemption is about $13.99 million per individual. This means you could give away up to roughly $14 million over your life (above the annual exclusions) and/or die with that much in your estate, and no federal gift or estate tax would be due.

If you are married, you each have your own exemption (and special rules allow a surviving spouse to use a deceased spouse’s unused exemption, a feature called portability). Because this exemption is so high, the vast majority of Americans will never owe federal gift or estate taxes – these taxes target only the wealthiest families.

Federal Estate Tax (Estate-Paid): If someone dies and leaves behind an estate worth more than the exemption, a federal estate tax applies to the amount over the exemption. The estate itself is responsible for paying this tax, using the assets before distribution to heirs. The top federal estate tax rate is 40%. Most estates, however, are below the exemption threshold and owe no tax at all.

For example, an individual who dies in 2025 with an estate valued at $10 million would owe zero federal estate tax, because $10 million is under the $13.99 million exemption. On the other hand, if someone dies in 2025 with a $20 million estate (having made no large gifts in life), the estate might owe tax on roughly $6.01 million (the amount above the exemption). At a 40% rate, that would be about $2.4 million in tax, paid by the estate. The beneficiaries would receive the remaining money. The heirs themselves do not have to write a check to the IRS – it’s the estate (managed by the executor) that handles the payment.

No Federal Inheritance Tax: It’s worth emphasizing that the U.S. federal government doesn’t tax inheritances received by individuals as such. Whether you inherit cash, property, or investments, you do not report that inheritance as income on your federal tax return, and there is no special federal inheritance tax on the beneficiary. The only federal taxes that might come into play are the estate tax (paid by the estate) or possibly income taxes on certain inherited assets. For example, if you inherit a traditional IRA or 401(k), you’ll pay income tax on distributions from those accounts (because the original owner never paid income tax on that money). But the act of inheriting money or property itself is not a taxable event in terms of income tax.

Gift vs. Estate Tax – Unified System: The gift tax and estate tax work together. Every taxable gift you make during life (above the annual exclusion) reduces the amount you can pass tax-free at death. Conversely, if you don’t use any of your exemption on lifetime gifts, you can leave the full amount at death tax-free. This unified approach prevents people from simply giving away all their assets on their deathbed to escape estate tax.

In the past, before gift taxes existed, wealthy individuals could avoid estate tax by transferring wealth just before death. Congress closed that loophole by introducing the federal gift tax in 1932 and later unifying it with the estate tax in the 1970s. The takeaway is that large gifts and estates ultimately draw from the same tax-free pool (your lifetime exemption) so you can’t double-dip to avoid taxes.

Who Files and Pays: For a taxable gift, the donor is responsible for filing Form 709 and paying any tax due (by April 15 of the year after the gift). For an estate, the executor of the estate files the federal estate tax return (Form 706) and pays any estate tax from the estate’s funds, typically within nine months of the date of death. Beneficiaries usually just receive their inheritance after these taxes (if any) have been settled by the estate.

What If the Giver Doesn’t Pay? The IRS expects the donor to pay gift tax if owed. But what if someone makes a large gift, owes tax, and then doesn’t pay it? Tax law provides that the IRS can collect unpaid gift tax from the recipient of the gift if necessary, up to the value of the gift. This is a rare situation, but it means you can’t completely dodge liability by refusing to pay – your beneficiary might be stuck with the bill if you skip out on a large gift tax. In practice, because of the high exemptions, this scenario is uncommon, but it’s good to know that the government has that backstop.

Upcoming Changes: One important note – the federal estate and gift tax exemption (currently around $13.99 million) is scheduled to drop roughly by half after 2025, when provisions of the 2017 Tax Cuts and Jobs Act expire. In 2026, unless laws change, the exemption will revert to around $5–6 million per person (adjusted for inflation). This means more estates could potentially be subject to estate tax starting in 2026.

Wealthy individuals are actively planning for this by making large gifts before 2026 to lock in the current higher exemption. The IRS has confirmed that gifts made under the higher exemption won’t be clawed back if the exemption later falls – so this is a “use it or lose it” opportunity for those with very large estates. It’s something to keep in mind if your estate might be in that range.

State-Level Differences: Estate and Inheritance Taxes by State

While the federal rules get most of the attention, state laws can also impose taxes on gifts or inheritances, and they vary widely. Not all states have these taxes – in fact, most do not. But understanding your state’s rules is crucial, because who pays can differ at the state level.

State Estate Taxes: As of 2025, 12 states and the District of Columbia impose their own estate tax. These include states like New York, Massachusetts, Illinois, Washington, Oregon, Minnesota, and others. State estate taxes are similar in concept to the federal estate tax: they are levied on the estate of the deceased, based on the total value of assets, and paid out of the estate’s funds by the executor. However, state estate tax exemptions are often much lower than the federal exemption. For example, the estate tax exemption in Massachusetts is only $1 million – far below the federal $13.99 million. That means an estate of $2 million in Massachusetts (even though it owes nothing federally) could face a state estate tax bill. State estate tax rates usually range roughly from 10% up to 16%. Importantly, beneficiaries do not personally pay estate tax; it’s taken from the estate before they get their inheritance.

State Inheritance Taxes: An inheritance tax is different – it’s imposed on the person receiving an inheritance, rather than on the estate as a whole. As of 2025, only five states impose an inheritance tax: Pennsylvania, New Jersey, Nebraska, Kentucky, and Maryland. (Iowa recently phased out its inheritance tax, ending it entirely as of 2025.) Each of these states has its own rules and rates, but a common theme is that close relatives are exempt or pay lower rates, while more distant relatives or unrelated heirs pay higher rates. Typically, spouses are fully exempt from inheritance tax, and in most of these states, children and other lineal descendants are either exempt (as in New Jersey and Maryland) or taxed at a low rate (Pennsylvania charges 4.5% for transfers to children). Siblings, nieces/nephews, and unrelated inheritors often face higher rates. For instance, Pennsylvania taxes siblings at 12% and other non-family heirs at 15%. New Jersey’s inheritance tax ranges from 11% to 16% on amounts above certain exemptions for non-immediate family. Kentucky can impose up to 16% on distant relatives or friends. Nebraska’s inheritance tax can be as high as 15% for nonrelatives (after a small exemption).

So, who pays an inheritance tax? In those states, the beneficiary is legally responsible for paying the tax on what they receive. For example, if you inherit $50,000 from an aunt who lived in Pennsylvania, you (as the niece or nephew) might owe Pennsylvania inheritance tax of 15% on that amount. It’s usually the heir’s responsibility to file a state inheritance tax return and pay the tax by the required deadline (often within 9–12 months of the death). In practice, the estate’s executor often helps by informing beneficiaries of their tax obligation, and sometimes the executor may even pay it out of the estate assets for convenience (especially if the will directs them to do so). But fundamentally, it’s a tax on the beneficiary’s share.

No State Gift Taxes (Mostly): The good news is that almost no states impose a gift tax on lifetime gifts. The one exception is Connecticut, which has a state gift tax that works alongside its estate tax. Connecticut residents who make very large gifts (over Connecticut’s own exemption, which is similar to the federal threshold) could owe state gift tax of up to 12%. Aside from Connecticut, you generally will not encounter a separate state gift tax.

However, not having a specific gift tax doesn’t mean you can always avoid state taxes by gifting assets right before death. Several states have what are known as “clawback” provisions.

“Clawback” and “Deathbed Gifts”: Some states with estate or inheritance taxes have laws to prevent last-minute tax avoidance through gifting. For example, New Jersey presumes that any gifts made within 3 years of death to someone who would have been subject to NJ inheritance tax are made “in contemplation of death.” Such gifts are pulled back into the inheritance tax calculation, meaning the beneficiary may still have to pay New Jersey inheritance tax on that gift. Pennsylvania takes a similar approach with a shorter window: any gift made within 1 year of death (to someone other than an exempt recipient like a spouse or charity) is subject to Pennsylvania’s inheritance tax. Nebraska’s inheritance tax law also includes certain transfers made within 3 years of death if they were made for less than full value. On the estate tax side, a state like Minnesota requires that taxable gifts made within 3 years before death be added back into the estate for calculating Minnesota’s estate tax.

The bottom line: if you live (or own property) in a state with estate or inheritance taxes, you can’t always avoid the tax by gifting at the last minute. The state may still count those gifts as part of the taxable estate or inheritance. The specifics vary by state, but it’s important to know if your state has any “look-back” period. For instance, if your elderly uncle in New Jersey gifts you a large sum and then passes away a year later, you might still get a tax bill from New Jersey as if it were an inheritance.

State Tax Administration: If an inheritance tax is due, the beneficiary typically files a return with the state and pays the tax. If a state estate tax is due, the executor files a state estate tax return and the tax is paid out of the estate. Both are usually due within about 9 to 18 months after death (depending on the state, with possible extensions). Many states offer small discounts for early payment of inheritance tax or charge interest/penalties for late payment.

Planning Note: Because state laws differ so much, where you live (and die) can have a big impact on tax liability. Some people actually relocate to states with no estate or inheritance tax to reduce future tax burdens on their heirs. For example, moving from New Jersey (which has an inheritance tax) to Florida (which has neither estate nor inheritance tax) means your heirs won’t face any state death taxes at all. Later in this article, we’ll discuss strategies to handle these state taxes if moving isn’t feasible.

Key Terms and Concepts (Glossary)

To navigate this topic, it helps to understand some key terms and entities involved in gift and inheritance taxation. Here’s a quick glossary:

Donor: The person who gives a gift. For tax purposes, the donor is generally responsible for any gift tax.
Donee (Recipient): The person who receives a gift. The donee never pays the gift tax, and gifts are not income to them.
Gift Tax: A federal tax on the transfer of money or property to someone else without receiving equal value in return. Applies to lifetime gifts. Paid by the donor if applicable.
Estate Tax: A tax on the right to transfer property at death, imposed on the deceased’s estate. Calculated on the overall value of the estate above any exemption. Paid by the estate (before heirs get their shares).
Inheritance Tax: A state-level tax (in certain states) on the amount an heir receives from a deceased person. The tax is paid by the beneficiary who inherits, and rates often depend on the beneficiary’s relationship to the decedent.
Annual Exclusion: The amount you can give to any one person in a year without it being a taxable gift or requiring a gift tax return. This is $18,000 per recipient in 2024 and $19,000 in 2025 (indexed for inflation). Gifts under this amount to each person each year are excluded from gift tax.
Lifetime Exemption (Unified Credit): The total amount you can give away during life and/or leave at death without incurring federal gift or estate tax. For 2025, this unified exemption is $13.99 million per individual. If you’re married, you effectively have double that between both spouses (especially with portability). This is sometimes called the basic exclusion amount.
Portability: A feature of the federal estate tax that allows a surviving spouse to inherit the unused portion of a predeceased spouse’s estate tax exemption. With portability (and proper filing), a married couple can shield up to nearly twice the individual exemption from estate tax.
Step-Up in Basis: Not a tax on gifts or inheritance itself, but an important related concept. When someone inherits assets like stocks or real estate, the tax basis of those assets is “stepped up” to their market value at the date of death. This means if the heir later sells the asset, capital gains tax is only on the increase after inheritance. By contrast, if the asset was gifted during the giver’s life, the recipient gets a carryover basis (the original cost basis), so they could owe capital gains tax on the entire appreciation since the original purchase. The step-up in basis often makes inheriting appreciated assets more tax-efficient than receiving them as gifts during the owner’s life.
Generation-Skipping Transfer (GST) Tax: Another federal tax that applies when you transfer wealth to someone who is two or more generations below you (for example, a grandparent leaving assets directly to a grandchild). The GST tax is separate but similar to the estate/gift tax and also typically paid by the transferor or the estate. It has its own lifetime exemption (also $13.99M in 2025). GST tax mainly affects large transfers that “skip” a generation.
Executor: The person named in a will (or appointed by a court) to administer a deceased person’s estate. The executor is responsible for valuing assets, paying the estate’s debts and taxes, and distributing the remaining assets to the beneficiaries.
Probate: The legal process of validating a will and settling an estate through the court system. It’s not a tax, but it’s worth mentioning because some people confuse probate fees or procedures with taxes. Probate is about transferring legal title of assets and ensuring the will (or state intestacy law) is followed; estate tax is a separate issue concerning the government’s claim on the estate.

With these terms in mind, let’s look at some data and scenarios that illustrate how these taxes really work.

By the Numbers: Facts and Evidence on Gift & Inheritance Taxes

It helps to see how many people actually face these taxes and what the data says. The reality is that very few Americans end up paying gift or estate/inheritance taxes, thanks to high exemptions and limited state taxes. Here are some telling facts and figures:

Fewer than 0.1% of estates pay federal estate tax. Out of the millions of Americans who die each year, only around 2,000–3,000 estates end up owing any federal estate tax. That’s roughly one in a thousand. In 2021, for instance, about 2,500 estates paid federal estate taxes, collectively around $18 billion. The estate tax is highly concentrated on ultra-wealthy families.
Gift tax is even more rarely paid. While thousands of people file gift tax returns annually, over 98% of those returns report no tax due. Most gifts simply use a portion of the lifetime exemption rather than triggering an immediate tax. Paying gift tax out of pocket typically happens only for extremely wealthy individuals who have exhausted their lifetime exemption.
State “death taxes” have become uncommon. Many states used to tax estates or inheritances, but today only 17 states (and D.C.) have any estate or inheritance tax in effect. This number continues to shrink as states phase out these taxes to stay competitive. Most Americans now live in states with no estate or inheritance tax at all.
Inheritance taxes hit a small minority of heirs. Even in states that have inheritance tax, many beneficiaries (like spouses, children, or other close family) are exempt. The tax generally affects more distant heirs. Nationwide, it’s estimated only around 2% of inheritances end up subject to any state inheritance tax.
Historical note: The federal government hasn’t imposed an inheritance tax since 1902. The modern estate tax began in 1916, and the gift tax in 1932, primarily to prevent wealthy individuals from avoiding the estate tax by gifting assets before death. Over time, many states followed suit with their own inheritance or estate taxes, but the trend in recent decades has been to eliminate or reduce them.
Tiny share of revenue: Estate and gift taxes make up only about 1% or less of federal revenues. State estate/inheritance taxes also contribute a very small share of state budgets (for example, all state death taxes combined were about $7 billion in 2021, roughly 0.2% of state revenues). Because these taxes affect so few people and raise relatively little money, there’s constant debate about their fairness and future.
Donee liability is real (but rare). If a donor fails to pay gift tax that was due, the IRS can hold the gift’s recipient liable for the tax (to the extent of the value of the gift). This backstop is seldom used, but it did come up in a notable case where years after a billionaire made large gifts without paying taxes, the government went after the heirs to collect the unpaid gift tax.
Courts allow creative tax maneuvers for the wealthy. High-net-worth families sometimes employ complex strategies to minimize gift and estate taxes, and courts have weighed in on these. For example, in one Tax Court case (Steinberg v. Commissioner, 2013), the court allowed that if a gift recipient agreed to assume potential estate tax liability (should the donor die within three years of the gift), it reduced the taxable value of the gift — a technique known as a “net gift.” These niche strategies illustrate how tax liabilities can be contractually shifted in advanced planning. However, for most people, these exotic tactics aren’t relevant; the main thing is to understand the straightforward rules of who pays what.

All of this data underscores that while most people won’t directly pay “inheritance tax on gifts,” the rules still matter, especially for those with substantial assets or those in certain states. Next, let’s walk through some concrete examples to see these principles in action.

Real-Life Examples: How Gift and Inheritance Tax Rules Apply

Sometimes the best way to understand these taxes is through real scenarios. Here are a few examples that illustrate who pays in different situations:

Example 1: A Generous Parent Gifting Cash – Maria is a mother who wants to help her son buy a house. In 2025, she gifts him $100,000 in cash. How is this handled?

Maria can give $19,000 with no paperwork or tax — that portion is covered by the annual exclusion. The remaining $81,000 exceeds the annual limit, so Maria will file a gift tax return reporting an $81,000 taxable gift. She won’t owe any gift tax out of pocket because it simply uses $81,000 of her lifetime exemption.

Who pays tax in this case? Neither party owes immediate tax. Maria uses a small part of her lifetime gift/estate exemption but pays no current tax, and her son owes nothing on the gift. (If Maria later dies with a large estate, the $81,000 will already be counted against her exemption then.)

Example 2: Gifting Stock vs. Inheriting Stock – John has a portfolio of stock worth $500,000 that he bought years ago for $100,000 (thus $400,000 of unrealized gain). He’s considering transferring this wealth to his daughter, Jane, either now or through his will.

If John gifts the stock now (while alive): The gift is over the annual exclusion, so John would file a gift tax return. He likely owes no gift tax because it’s within his lifetime exemption. Jane, as the recipient, pays no gift tax or income tax upon receiving the shares. However, Jane assumes John’s cost basis of $100,000 (carryover basis). If she later sells the stock for $500,000, she must pay capital gains tax on the $400,000 gain that accrued during John’s ownership.
If Jane inherits the stock after John’s death: Let’s say John holds onto the stock and it’s worth $500,000 at his death. Assuming John’s total estate is below the estate tax exemption, no estate tax applies. Jane inherits the stock with a stepped-up basis of $500,000 (its value at John’s death). If she immediately sells it for $500,000, she would owe zero capital gains tax on John’s $400,000 of gain — that gain is effectively wiped out by the step-up in basis.

Outcome: In this scenario, neither the gift nor the inheritance triggers estate or gift tax due to John’s wealth level, but the income tax outcome differs significantly. By inheriting, Jane avoids capital gains on the past appreciation (thanks to the step-up), whereas a lifetime gift would have left her with a large capital gains tax bill when selling. This example shows why sometimes it’s better not to gift highly appreciated assets and instead let heirs inherit them.

Example 3: Estate with a Federal Estate Tax Liability – David passes away in 2025, leaving an estate worth $25 million. He made no significant gifts during his life. The federal estate tax exemption in 2025 is $13.99 million, so roughly $11.01 million of David’s estate is above the exemption and subject to tax.

At a 40% tax rate on that taxable amount, David’s estate owes about $4.4 million in federal estate tax. The executor will file an estate tax return and pay that $4.4 million to the IRS from the estate’s funds (likely by liquidating or using some assets). The remaining $20.6 million can then be distributed to David’s heirs according to his will.

Who pays in effect? The estate bears the tax burden. David’s heirs do not have to pay anything out of their own pockets or report the inheritance as income. They receive the $20.6 million (collectively) after the estate tax has been paid by the estate.

Example 4: State Inheritance Tax in Action – Susan lives in Pennsylvania and leaves $300,000 to her adult son and $50,000 to a close friend in her will. Pennsylvania’s inheritance tax rate for children is 4.5%, and for unrelated individuals it’s 15% (spouses are 0%).

When Susan dies, her son owes 4.5% of $300k, which is $13,500, to Pennsylvania. Her friend owes 15% of $50k, which is $7,500, to Pennsylvania. The executor of Susan’s estate informs each of them of their tax due. The friend and son each file a PA inheritance tax return and pay their respective taxes (often the tax can be mailed in with a simple form).

If Susan’s will stated that the estate should pay any inheritance taxes, then the executor would use estate funds to cover those amounts, meaning the beneficiaries wouldn’t pay out of pocket. But in the usual case, as here, each beneficiary is responsible for their share. Note how the friend’s inheritance was hit much harder (15%) than the son’s (4.5%) – that differential treatment based on relationship is typical in states with inheritance taxes.

Example 5: Last-Minute Gift vs. Inheritance in a Taxable State – Frank, a New Jersey resident, wants to leave $100,000 to his niece. New Jersey charges inheritance tax to nieces/nephews at 15% (after a small exemption). If Frank simply leaves $100k to his niece in his will, she would have to pay about $15,000 to New Jersey in inheritance tax.

Suppose instead Frank, a month before he dies, decides to gift $100,000 to his niece outright. Federally, that gift requires a gift tax return but no tax due (well within Frank’s $13.99M exemption). The niece receives the $100k with no federal tax. However, because the gift was made within 3 years of Frank’s death to someone who would have been taxed, New Jersey law treats it as if it were part of the estate. The niece will still owe the 15% NJ inheritance tax (roughly $15k) despite the pre-death gift.

Outcome: Frank’s last-minute gift did not avoid the inheritance tax. Only if he had made that gift more than 3 years prior would New Jersey have ignored it for inheritance tax purposes. This example shows that timing matters – some state taxes can reach back and grab gifts made shortly before death.

Example 6: No Inheritance Tax State – Consider someone living in Florida (which has no estate or inheritance tax). They could leave a $20 million estate to their heirs, and there would be no state taxes on that transfer at all – only a potential federal estate tax if above the federal exemption. By contrast, if that same person lived in a state like Nebraska or Pennsylvania, parts of that inheritance might face state tax. Location makes a big difference in who ultimately pays.

These examples demonstrate a range of outcomes:

Gifts during life put the responsibility (and any tax filing) on the donor, but rarely involve actual tax unless extremely large.
Inheritances shift the tax burden to the estate or, in some states, to the heir – but often no tax applies unless the amounts are substantial or state law kicks in.
Decisions like gifting now versus letting assets pass at death can have major income tax implications (e.g. losing a step-up in basis).
State-specific rules can dramatically alter what happens, so one must always consider the state law context.
With planning and knowledge of the rules, families can avoid most tax pitfalls and ensure the right person is handling any taxes that do arise.

Comparing Gift Tax, Estate Tax, and Inheritance Tax

Now let’s directly compare these taxes to highlight who pays what and when. The table below outlines key differences between the federal gift tax and a state inheritance tax:

Feature	Federal Gift Tax (Lifetime Gift)	State Inheritance Tax (At Death)
Who is responsible?	Donor (giver) of the gift is responsible for any tax and filings. The recipient pays nothing on receiving a gift.	Beneficiary (heir) is responsible for paying the tax on their inheritance (in states that have this tax). The estate itself isn’t charged this tax.
When it applies	Applies to lifetime transfers that exceed certain limits (annual and lifetime exemption). Assessed at the time of the gift (though usually no tax until very large cumulative gifts).	Applies to assets received at death by an heir, if the decedent’s state has an inheritance tax. Assessed after the person’s death, typically due within months of receiving the inheritance.
Tax rate & threshold	Up to 40% federal rate, but only on gifts beyond a very high lifetime exemption (~$14M in 2025). Annual exclusion ($19k in 2025) before even filing a return. In practice, few people ever owe gift tax.	Rates vary by state (e.g. 1% to 16%), often depending on the heir’s relationship to deceased and the amount. Close family usually taxed at 0% or low rates, distant relatives/unrelated can face higher rates. Many inheritances (especially to immediate family) are fully exempt.
Who pays it and how	Donor files IRS Form 709 if a gift exceeds the annual exclusion. If lifetime gifts exceed the exemption, donor pays the tax (normally due by April 15 of the following year). The recipient has no filing or payment requirement for the gift.	Beneficiary must file a state inheritance tax return (if applicable) and pay the tax, typically within 9–18 months of the death. The estate’s executor may assist or even pay it from the estate if directed, but legally the tax is on the beneficiary’s share.
Interaction with other taxes	Uses up part of donor’s unified lifetime exemption (thus reducing what can be passed tax-free at death). Gifted assets keep the donor’s original cost basis (no step-up), so the recipient may owe capital gains tax if they sell appreciated assets.	Inherited assets receive a step-up in basis (reducing capital gains on any pre-death appreciation). Inheritance tax is separate from any estate tax: some estates might owe both (e.g. a large estate in Maryland), but many estates are under federal tax limits yet still trigger a state inheritance tax for certain heirs.

What about estate tax vs. inheritance tax? Here’s a quick comparison of a federal or state estate tax versus a state inheritance tax:

Aspect	Estate Tax (Estate pays)	Inheritance Tax (Heir pays)
Levied on	The entire estate’s value (above exemption), before distribution to heirs. It’s essentially a tax on the wealth of the deceased.	Each individual heir’s share of the estate. It’s a tax on what you as a beneficiary receive.
Who pays to the gov’t	The executor/estate pays the tax from the estate’s funds. Heirs receive their inheritance minus the tax that was paid by the estate.	Each beneficiary pays their own tax due (usually sending payment with their inheritance tax return). If the will directs, the estate might pay on the heir’s behalf, but that’s optional.
Where it applies	Federal estate tax (above $13.99M) or certain state estate taxes (thresholds vary $1M–$5M in many states). No estate tax in most states.	Only in a few states. Close relatives often exempt, so usually applies to heirs like siblings, nieces/nephews, or unrelated persons inheriting.
Effect on basis	Estate tax does not affect basis; all assets get step-up in basis at death regardless. (Estate tax might indirectly encourage holding assets until death for that reason.)	Inheritance tax also does not affect the step-up; heirs still get stepped-up basis on inherited assets. The tax is just an extra cost for receiving the inheritance.

Bottom line: Estate taxes are paid by the estate before heirs get their share, whereas inheritance taxes are paid by the heirs out of what they receive. Gift taxes, meanwhile, are paid by the giver while still alive. Knowing who is on the hook in each case helps in planning and avoiding surprises.

Pitfalls and Traps: What to Watch Out For

When dealing with gifts and potential inheritance taxes, several pitfalls can trip up families. Here are some common ones and how to avoid them:

1. Assuming “No Tax” Without Checking State Laws: Perhaps the biggest mistake is assuming that because there’s no federal inheritance tax, you don’t have to worry at all. Pitfall: An heir gets an unexpected state tax bill because they didn’t realize the decedent’s state had an inheritance or estate tax. Avoid it by knowing your state’s rules (or the state where your benefactor lived) and planning accordingly. For example, if Grandma lives in Nebraska and leaves money to a non-family member, that beneficiary should expect a state inheritance tax, even though there’s no federal tax.

2. Confusing Gift Tax with Income Tax: People often ask, “Will I owe income tax on this gift?” In the U.S., gifts and inheritances are not treated as income. Pitfall: A recipient might mistakenly try to report a gift as income (or fear they owe income tax), or a donor might not realize they have a filing requirement for a large gift. Avoid it by remembering: the giver deals with any gift tax paperwork, and the recipient generally doesn’t owe or report anything when receiving a gift or inheritance. (Exceptions are things like inherited retirement accounts, which are taxable when withdrawn, but that’s due to deferred income, not an inheritance tax.)

3. Ignoring the Gift Tax Filing Requirement: Many people make the error of giving over the annual exclusion amount and not filing Form 709. Pitfall: Years later, when the person dies, unreported gifts come to light, complicating the estate administration and potentially incurring IRS penalties for failure to file. Avoid it by filing a gift tax return for any year you give above the annual exclusion to someone. Filing doesn’t mean you owe tax; it’s just the necessary record-keeping. Don’t be afraid to file – be afraid of not filing when you should.

4. Last-Minute “Deathbed” Gifting to Avoid Tax: Trying to transfer assets in extremis to dodge estate or inheritance tax can backfire. Pitfall: The attempt doesn’t actually avoid the tax and may create complications. We saw this with Frank’s New Jersey example: the state still taxed the gift. Another issue is you might deprive heirs of a step-up in basis by gifting assets right before death. Avoid it by doing any tax-motivated gifting well in advance (outside look-back periods) and weighing the income tax costs. Ideally, incorporate gifting into your long-term estate plan, not as an 11th-hour scramble.

5. Overlooking Capital Gains vs. Estate Tax Trade-off: In focus on estate tax, people sometimes forget about income tax consequences. Pitfall: A wealthy parent gifts appreciated stock to avoid estate tax, but the kids end up paying high capital gains tax, which might exceed the estate tax that could have been due. Avoid it by balancing estate and income tax considerations. If your estate is moderately over the exemption, it may actually be cheaper overall to pay some estate tax and let heirs receive a stepped-up basis, rather than avoid estate tax but saddle them with large capital gains. Every situation is different – run the numbers or consult an advisor.

6. Forgetting About the 2026 Exemption Drop: Right now, few worry about federal estate tax because the exemption is so high. But it’s scheduled to shrink by 50% in 2026. Pitfall: A family that assumes “we’re under the limit” could suddenly find themselves over the new lower limit and facing a tax. Avoid it by staying aware of law changes. If your combined net worth is, say, $8 million, you might be under today’s $13.99M per couple, but over a post-2025 $6–7M per person scenario. Consider using the current high exemption (through gifting or other strategies) if appropriate, or at least keep an eye on Congress for any updates.

7. Not Utilizing the Annual Exclusion and Direct Payments: Every year you can move a chunk of wealth tax-free via the annual gift exclusion, and even more by paying tuition or medical expenses directly for someone. Pitfall: Wealthy individuals who intend to reduce their estate sometimes don’t take full advantage of these small but powerful tools. Avoid it by making regular annual exclusion gifts if you can afford to, and paying educational or medical bills for loved ones directly. Over many years, these transfers can total a lot, all outside the taxable estate, with zero tax or filing required.

8. Assuming “Family = No Tax” Always: Many people think that if they leave everything to family, no taxes will apply. It’s true there’s no inheritance tax for close family in most places, but estate tax can still hit if the estate is above the threshold. Pitfall: A large estate going entirely to children may still face a state estate tax (say, in Oregon or Massachusetts) even though an inheritance tax would not apply. Avoid it by considering both types of taxes. Know your state’s estate tax exemption. For instance, an $2 million estate all to your kids is fine federally, but in Oregon (with a $1M exemption) that estate would owe state tax.

By being mindful of these pitfalls, you can sidestep a lot of trouble and ensure your generosity isn’t unexpectedly shared with the tax authorities.

Strategies to Minimize Tax on Gifts and Inheritances

Good estate planning can lawfully reduce or eliminate these taxes so that more of your wealth goes to your loved ones. Here are some effective strategies:

Use the Annual Gift Tax Exclusion: Don’t underestimate the power of gifting up to $15k/$16k/$17k/$19k per person each year (amount varies by year) without any tax or filing. If you have the means, systematically gifting to children, grandchildren, or others each year can slowly transfer significant wealth out of your estate tax-free. A married couple can double the amount per recipient (by “splitting” gifts). Over a decade, a couple could give away, say, $400,000 to their child (10 years × $40k/year to that child as a couple) with zero tax and no impact on their lifetime exemptions.

Direct Payments for Tuition/Medical Expenses: Beyond the annual exclusion, remember that you can pay unlimited amounts for someone’s tuition or medical bills without it counting as a taxable gift – as long as you pay the institution or provider directly. For example, a grandparent can pay a $50,000 college tuition bill or a $20,000 hospital bill for a grandchild outright, and it doesn’t even require a gift tax form. This is a great way to help family members while avoiding any tax implications.

Charitable Gifting and Bequests: If you have charitable intentions, giving to qualified charities can provide both income tax deductions (for lifetime gifts) and estate tax benefits. Gifts to charity are not subject to gift tax, and assets left to charity at death are deducted from the estate for estate tax purposes. Some people establish charitable trusts or foundations, which can offer a way to give back and get estate tax relief. Basically, money given to charity is money that won’t be taxed by the IRS or state upon your death.

Spousal Transfers and Portability: Transfers between U.S. citizen spouses are completely free of gift or estate tax due to the unlimited marital deduction. This means married couples can arrange their estate so that no tax is due when the first spouse dies – everything can pass to the survivor. With portability, if one spouse dies without using all of their $13.99M exemption, the survivor can add the unused portion to their own exemption. To use portability, the executor must file a federal estate tax return when the first spouse dies (even if no tax is owed) and make the portability election.

By leveraging portability, a married couple in 2025 could potentially shield nearly $28 million from estate tax (combined). It’s an essential strategy for wealthy couples – just be sure not to miss the filing requirement after the first death.

Strategic Gifting Before Exemption Limits Drop: For very wealthy individuals who anticipate a taxable estate in the future, consider using your lifetime exemption now. As noted, the exemption is set to decrease after 2025. If you have an estate that will likely be well over the future exemption (say, tens of millions), making large gifts now can “lock in” the current high exemption. For example, if you transfer $8 million to your heirs or to a trust for their benefit in 2025, you use $8M of your exemption. If the exemption falls to $6 million in 2026, you’ve essentially removed that $8M from your estate tax-free; it won’t be pulled back into a now smaller exemption. The IRS has promised no clawback – you won’t be penalized for using today’s higher allowance. This strategy needs careful planning (gifts that large should often be done via trusts or other structures), but it can save a big estate tax bill later.

Trusts for State Tax Planning: If you live in a state with a low estate tax threshold, a well-crafted trust can save your family money. For instance, a credit shelter trust (bypass trust) can be set up at the first spouse’s death in states like Massachusetts or Oregon to fully use that spouse’s state exemption, so it doesn’t go to waste (since many states don’t have portability). Trusts can also keep assets out of your taxable estate entirely if you transfer them during life – for example, putting assets in an irrevocable trust for your children means those assets (and their future appreciation) aren’t counted in your estate when you die.

Another use is to avoid inheritance tax: while you generally can’t dodge inheritance tax if assets pass at death, you could, say, gift assets into a trust for a beneficiary during your life (well ahead of death) so that at death those assets aren’t part of your estate or subject to inheritance tax. The trust holds them for the beneficiary. This must be done outside any clawback window.

Life Insurance for Liquidity and Tax Coverage: Life insurance is often used to provide liquidity to pay estate taxes or to compensate for them. For example, if most of your wealth is in a family business or real estate and you’re near the taxable estate range, an insurance policy can ensure there’s cash to pay any estate tax without forcing a sale of assets. If set up properly (e.g., owned by an irrevocable life insurance trust so that the payout isn’t included in your estate), the insurance proceeds are themselves free of estate tax and can be used to pay the taxes or provide for your heirs. Also, life insurance left to a named beneficiary is generally not subject to inheritance tax in the states that have one, which can make it an efficient way to leave funds to someone who’d otherwise be taxed.

Consider Relocating or Changing Domicile: This is a drastic measure for some, but moving to a state with no estate or inheritance tax can save your heirs a lot, especially if you have significant wealth. If you’re approaching retirement and live in, say, New Jersey or Maryland, relocating to Florida or Arizona could eliminate state death taxes entirely. Even if you don’t move, be mindful of owning property in different states. Owning a vacation home in a state with an estate tax (like Maine or Vermont) could subject that property’s value to that state’s estate tax. Some people transfer such properties into LLCs or trusts, or plan to sell them before death, to avoid multi-state tax issues.

Business and Asset Valuation Discounts: For family business owners or those with illiquid assets, certain strategies can reduce the value counted for estate tax. Placing assets into a family limited partnership (FLP) or LLC and then gifting minority interests can qualify for valuation discounts (because those interests lack control and marketability). This allows you to transfer more value within the exemption amount. This is a complex area and the IRS scrutinizes it, but when done correctly, it can significantly cut estate/gift tax. Similarly, Grantor Retained Annuity Trusts (GRATs) can pass asset appreciation to heirs with little to no gift tax cost. These tools are beyond the scope of this article, but they exist for those who need advanced planning.

Stay Informed and Get Professional Advice: Tax laws change, and estate planning is not one-size-fits-all. A strategy that works for your neighbor might not be right for you. Consider consulting with an estate planning attorney or tax advisor, especially if you have a high-value estate or unique assets. They can help tailor the above strategies and ensure you’re in compliance while achieving your goals. Sometimes a simple plan (like a well-drafted will and some life insurance) is all that’s needed; other times, complex trusts are warranted. The key is that planning ahead usually yields better results than reacting later.

By using the available exclusions, smart transfer techniques, and keeping an eye on both federal and state rules, you can legally minimize the tax bite and direct your assets where you want them to go.

Common Mistakes to Avoid in Gift and Estate Planning

Even with good planning, there are some classic mistakes you want to avoid:

Mistake: Not Keeping Records of Gifts. If you give sizable gifts over the years, it’s crucial to keep track and keep copies of any Form 709 filed. Without clear records, your executor might have trouble or the IRS might question your lifetime exemption usage. Avoid it: Maintain a log of any gifts above the annual exclusion and let your executor or family know where to find this info.
Mistake: Gifting Assets You Still Need. Some people give away a house or large sum to children to “get it out of their estate,” only to find they’ve made themselves financially insecure. Also, large gifts can affect Medicaid eligibility (there’s a 5-year lookback for nursing home assistance). Avoid it: Don’t impoverish yourself for the sake of tax planning. Ensure any gifting plan leaves you with ample resources for your own life (and consult an elder law advisor if Medicaid is a concern).
Mistake: Neglecting to File for Portability. If you’re the executor for a married person who died, you might think “no estate tax, so no return needed.” But if the estate was under the exemption and the spouse is alive, failing to file means losing the unused exemption. Avoid it: Whenever a spouse dies, evaluate filing a federal estate tax return to elect portability of any leftover exemption to the surviving spouse – it could save millions later, and the IRS now even allows a simplified late filing in many cases if missed.
Mistake: DIY Planning Without Understanding the Rules. There are countless stories of people making their own estate plans that lead to unintended tax consequences. For example, adding a child’s name to a deed (to “avoid probate”) might actually constitute a taxable gift and also forfeit half the step-up in basis on that home. Avoid it: Before you take actions like retitling assets or creating itsy-bitsy trusts on your own, run it by a professional or do thorough research. A little upfront cost can prevent very costly mistakes.
Mistake: Overcomplicating When Unnecessary. On the flip side, don’t assume you need fancy trusts or schemes if you really don’t. If your estate isn’t going to be taxable under current or even future thresholds, overly complex planning can be a waste of time and money (and can confuse your heirs). Avoid it: Focus on the basics – a solid will, proper beneficiary designations, maybe a living trust for probate avoidance – if taxes aren’t an issue for you. Make sure your plan is primarily driven by family and personal considerations; tax avoidance is only a concern if you’re actually exposed to a tax.

By dodging these mistakes, you’ll keep your estate plan on the right track and ensure the tax aspects work as intended.

FAQs: Quick Answers to Common Questions

Q: Do I have to pay income tax on a gift or inheritance I receive?
A: No. Inheritances and gifts are not counted as income for federal tax purposes. You do not pay income tax on a gift or inheritance you get.

Q: How much money can I gift someone without having to pay any tax?
A: About $19,000 per person per year is allowed with no tax or return needed. Above that, you file a gift tax return, but no gift tax is owed until your total gifts pass ~$14 million.

Q: Who is responsible for paying the gift tax – the giver or the receiver?
A: The giver (donor) is responsible. The person receiving a gift never has to pay gift tax or report it as income. If any tax is due, it’s paid by the donor.

Q: Which states still have an inheritance tax?
A: As of now, only five states do: Pennsylvania, New Jersey, Kentucky, Nebraska, and Maryland. (Iowa’s was repealed in 2025.) These states tax certain heirs on what they inherit, usually with exemptions for close family.

Q: What’s the difference between an estate tax and an inheritance tax?
A: Estate tax is taken out of the deceased person’s estate as a whole (the estate pays it before heirs get anything). Inheritance tax is paid by each beneficiary individually on what they receive (only in some states).

Q: If I inherit money or property from my parents, will I owe any taxes?
A: Generally, no. If the estate is below the federal threshold, there’s no federal estate tax. Only a few states have inheritance tax, and if you’re not in one, you won’t owe state tax.

Q: Can I avoid estate tax by giving away my assets before I die?
A: You can reduce estate tax by gifting before death, but it’s not a simple solution. Big gifts count against your lifetime exemption (so they don’t escape tax), and some states will still tax deathbed gifts.

Q: What happens if I don’t file a gift tax return when I should have?
A: Failing to file when required can lead to IRS penalties and cause problems later. The IRS can come after that unreported gift even many years down the line. Always file the return if it’s required.

Q: Does an inheritance from a foreign relative have U.S. tax?
A: An inheritance or gift from a foreign person isn’t taxed by the U.S. You might need to report it if it’s very large, but no tax is due on simply receiving those assets.

Q: Are life insurance proceeds taxable to beneficiaries?
A: Life insurance payouts are generally not taxable to beneficiaries. If the deceased owned the policy, the payout might be counted in their estate for estate tax, but advanced planning can avoid that.