Inheritance tax is a levy imposed on certain property or assets inherited from a deceased individual or individual's estate, depending on the value of the asset and the nature of the deceased's relationship to the beneficiary. As of 2021, the federal government does not have an inheritance tax; however, there are six states that do. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Inheritance tax applies to all property owned by the deceased, such as real estate, stocks and bonds, bank accounts, vehicles and other tangible or intangible personal property. The applicant for the tax must report the value of any inherited assets on their tax return and pay the applicable taxes.

Inheritance taxes are typically lower for close relatives, as opposed to distant relatives or non-relatives of the deceased. For example, inheritance taxes may be higher for non-relatives than close relatives, or even exempted in the case of close relatives.

Inheritance tax rates are often dependent on the value of the property being inherited. For instance, in New Jersey, the inheritance tax rate ranges from 11% to 16%, depending on the size of the estate and the relationship of the heir to the deceased.

The good news is, inheritance tax can be minimized or avoided by taking other steps, such as leaving heirs money via trusts or insurance policies, or by gifting sums during one's lifetime. Gifting is an effective way of limiting the amount of inheritance tax to be paid, because any assets gifted to others are exempt from taxation. Ultimately, an experienced estate lawyer or accountant can help you understand any and all estate and inheritance tax laws in your state so you can plan for your financial future.