Home / Legal & Financial / Smart Inheritance & Gift Tax Strategies for Beneficiaries

Smart Inheritance & Gift Tax Strategies for Beneficiaries

By: Serena Tanner • Edited by: Alyssa Hill • Subject Matter Expert Reviewed by: Jennifer Wills • 10 cited sources • Updated Oct 29, 2024

In many cases, wealth transfers come with a significant tax burden. Even an inheritance can lead to a big tax bill. However, with tax-efficient planning, you can preserve more of your financial legacy, ensuring your loved ones benefit more from the wealth you’ve accrued. 

Key Takeaways

• Inheritance taxes are imposed at the state level for property transfers after death.
• Gift taxes are federally imposed on assets transferred while the donor is alive.
• Several strategies can minimize tax liabilities by taking advantage of trusts and tax exemptions. 

What Is Inheritance Tax?

Some states charge an inheritance tax when you inherit an asset. Unlike an estate tax, it’s paid by the recipient rather than out of the deceased’s estate. There is no federal equivalent.

This tax applies after an individual passes away and gifts assets to their beneficiaries. Because it’s a state-level tax, the exact rate of taxation varies by locality and the relationship between the decedent and the beneficiary.

How Much Is Inheritance Tax?

The amount you pay in inheritance tax depends on several variables. These include the value of the inheritance, your relationship to the decedent, and where the decedent lived or owned property^[1].

What States Have Inheritance Tax?

Only six states in the U.S. have an inheritance tax:

• Iowa 
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

If the person who left you an inheritance lived or owned property in one of these states, you may have to pay the inheritance tax^[2].

Examples of Commonly Inherited Assets

Inheritance tax applies to money or property received. Most commonly, this can include:

• Real estate
• Stocks and bonds
• Retirement accounts
• Life insurance
• Personal items
• Collectibles

What Is a Gift Tax?

Typically, gift taxes are imposed on the transfer of a property when the giver receives nothing or less than the property’s full value in return. These only apply to transfers made during the donor’s lifetime^[3].

The donor must pay this tax, and the exact amount depends on several factors. Annual and lifetime exemptions allow gifts up to a certain value to be given tax-free. In 2024, the annual exclusion per donee per year is $18,000^[4].

However, just because a gift exceeds this $18,000 figure doesn’t mean it triggers the gift tax. The 2024 lifetime gift tax exemption is $13.61 million per person^[5].

How Much Can You Gift Tax-Free?

You can gift a person up to $18,000 per year before you start dipping into your lifetime gift tax exemption. That $18,000 figure is per donee, so you could give each of your grandchildren $18,000 in 2024 before worrying about lifetime exemptions.

What Are the Main Differences Between Inheritance and Gift Tax?

Several differences exist between inheritance and gift taxes, including:

• Inheritance taxes are assessed after death when property transfers to a beneficiary. When you transfer assets while alive and receive less than fair market value or nothing in return, gift taxes may be imposed.
• Beneficiaries pay the inheritance tax, while donors pay the gift tax.
• States impose inheritance taxes, while gift taxes are imposed at the federal level. However, Connecticut also has a state-level gift tax^[6].
• The federally regulated gift tax offers significantly higher exemptions than inheritance taxes. Inheritance taxes may vary based on state laws and other factors.

Tax-Efficient Strategies For the Inheritance of Assets and Gifts

By strategically transferring your wealth, it’s possible to minimize tax liabilities. If you have a lot of assets to transfer when you pass, these tips can help.

Utilize the Annual Gift Tax Exclusion

Making use of the annual gift tax exclusion allows you to maximize the transfer of wealth and property while you’re still alive without incurring additional taxes. As of 2024, you can gift each person up to $18,000, allowing for earlier wealth transfer and reducing the taxable estate in the event of your death.

Leverage Lifetime Gift Tax Exemption

The lifetime gift tax exemption is part of the unified federal gift and estate tax exemption. It allows you to give up to $13.61 million in tax-free gifts during your lifetime. Currently, this number is influenced by tax reform that doubled the exemption from 2018-2025. However, in 2026, this number reverts to pre-2018 levels of $5 million^[7].

Utilizing this exemption can help you pass on your wealth without gift taxes while you’re still alive.

Setting Up Trusts

Certain types of trusts may also shield your assets from estate taxes while providing for beneficiaries or offering additional tax breaks. For example, an irrevocable life insurance trust (ILIT) is funded with life insurance policies and helps avoid your death benefit from being included in the calculations for your estate tax. You can also apply your annual gift tax exclusion to the trust to cover the premiums^[8].

A charitable remainder trust is another irrevocable trust allowing you to donate your assets to charity while beneficiaries draw annual income for a specified period. Upon the end of the term, the remainder of the trust is given to the named charitable organizations in the U.S.^[9].

Consider Charitable Donations

Charitable donations can fulfill philanthropic goals while also offering attractive tax savings.

Charitable lead trusts reduce a beneficiary’s transfer taxes by designating certain assets into the trust to benefit named charities. For a period of time, the trust makes payments to the charity. After that period, the trust pays named noncharitable beneficiaries. Depending on how it’s structured, it can minimize taxes paid on the assets.

With a charitable remainder trust, the named noncharitable beneficiaries receive monthly payments. At the end of the term, the remainder of the trust goes to the designated charities^[10].

Charitable donations can help nonprofit organizations carry out their missions and benefit community members who are in need. Along with the donor’s potential tax deductions, everyone wins.

Jennifer Wills, Licensed Financial Coach

Planning Now Saves Your Beneficiaries Time and Money Later

Gift and inheritance taxes can claim a significant portion of wealth transferred to your beneficiaries. By creating a well-planned strategy to pass on your assets, you can help reduce tax burdens. Consider speaking with a tax professional while creating your will to gain insight into how to preserve your wealth for the next generation.

Written by Serena Tanner

Serena Tanner attended the University of Washington, where she earned a degree in philosophy after many detours delving into human rights, law, psychology, and social work. Health and holistic wellness topics continue to hold a special place in her heart. When she's not reading or writing, she can be found exploring the Pacific Northwest with her two children and dogs.

---

Edited by Alyssa Hill

Alyssa Hill is an experienced editor and health writer. She holds an M.A. in journalism from the University of Arizona and is also a certified somatic practitioner. A former content manager for multiple start-ups in the marketing and health/medical industries, Alyssa has extensive experience writing medically accurate and well-researched content, editing articles for clarity and SEO, adhering to strict guidelines, and ensuring all content is up to standards.

---

Subject Matter Expert Jennifer Wills

Jennifer Wills is a finance SME with 12 years of experience as a licensed financial coach. She used her expertise and insurance and securities licensing to create customized plans to help families become properly protected, debt-free, and financially independent. When the time came for a career change, Jennifer used her skills and experience to build a freelance writing business. She started writing blog posts for an accounting and finance staffing agency and later wrote articles for Investopedia. Today, Jennifer writes content for clients in 75+ industries. In her downtime, she enjoys spending time with friends and traveling.