When wealth passes from one generation to the next, taxes can quickly become part of the conversation. But the term “death taxes” can be misleading because it combines two very different taxes: estate taxes and inheritance taxes.

Who pays the tax? When is it due? Which states impose it? And could it affect your family even if you’re nowhere near the federal estate-tax threshold?

These are increasingly relevant questions. The federal estate and gift tax basic exclusion amount is $15 million per individual in 2026, while estimates suggest that tens of trillions of dollars could move between generations in the coming decades.

Understanding how these taxes work—and where they differ—can help families prepare for one of the largest financial transitions of their lives.

Estate Tax vs. Inheritance Tax: Who Actually Pays?

The easiest way to understand the difference is to look at who is responsible for paying the tax.

An estate tax is generally a tax on the transfer of a person’s estate. It is typically paid by the estate before the remaining assets are distributed to beneficiaries.

An inheritance tax, on the other hand, is generally paid by the person receiving the inheritance.

Estate Taxes

Federal estate-tax rules generally consider the value of property a person owned or controlled at death. Depending on the circumstances, this can include:

• Investment accounts
• Real estate
• Business interests
• Certain life insurance proceeds
• Other property and financial assets

For 2026, the federal basic exclusion amount is $15 million per individual. A married couple may potentially preserve as much as $30 million of combined exclusion, assuming applicable requirements are met, including a timely portability election for a deceased spouse’s unused exclusion.

The top federal estate-tax rate remains 40%.

That high federal threshold, however, doesn’t necessarily mean families with estates below $15 million can ignore estate taxes.

Twelve states and Washington, D.C., impose their own estate taxes, and their exemption amounts can be considerably lower than the federal amount. Oregon, for example, has a $1 million exemption, while Massachusetts has a $2 million exemption.

As a result, an estate could owe no federal estate tax while still facing a state estate-tax obligation.

Inheritance Taxes

There is currently no general federal inheritance tax. Instead, inheritance taxes exist at the state level.

Five states currently impose them: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Unlike an estate tax, an inheritance tax generally falls on the beneficiary. How much is owed—or whether anything is owed at all—can depend heavily on the beneficiary’s relationship to the person who died.

Surviving spouses are exempt in each of the five states. Rules for children, grandchildren, other relatives and unrelated beneficiaries vary by state.

Geography matters, too. A beneficiary doesn’t necessarily escape an inheritance tax simply because they live in a state without one. For example, a Florida resident inheriting from a Pennsylvania decedent could potentially be affected by Pennsylvania’s inheritance-tax rules.

Maryland is currently unique in imposing both an estate tax and an inheritance tax.

The takeaway is relatively simple: where you live, where your family members live and where property is located can all matter.

Why the Wealth-Transfer Conversation Is Becoming More Important

Estate planning isn’t only a conversation for ultra-high-net-worth families.

Two significant developments are making these issues increasingly relevant.

First, federal legislation enacted in 2025 established a $15 million federal estate and gift tax basic exclusion amount for 2026, with future inflation adjustments. This prevented the exemption from falling substantially under the rules that previously would have taken effect.

As a result, fewer estates are expected to be subject to federal estate tax.

But federal estate tax is only one piece of the planning puzzle.

State taxes, asset protection, control over inherited wealth, business succession and family goals can still make trusts and other estate-planning strategies relevant.

Asset appreciation can also change the picture.

Real estate, business interests and investment portfolios can grow considerably over time. An estate that once seemed comfortably below a state estate-tax threshold could move closer to it as assets appreciate.

Then there is the broader demographic shift taking place across the country.

Baby boomers hold a substantial share of U.S. household wealth, and many are reaching ages when estate, legacy and succession planning become more immediate. Estimates of the amount expected to transfer to younger generations over the coming decades vary significantly—from approximately $36 trillion to more than $100 trillion, depending on the methodology and time period examined.

For younger generations, that means estate planning isn’t necessarily just about determining what will happen to their assets someday. It may also mean preparing to responsibly receive and manage wealth from parents or grandparents.

For adults in their late 20s through early 40s, an inheritance could take many forms: a brokerage account, retirement assets, a family home, other real estate or even an ownership interest in a business.

Each can bring different financial and tax considerations.

One particularly important issue is cost basis.

Under federal tax law, inherited property generally receives a basis equal to its fair market value at the date of death—or another permitted valuation date—subject to certain exceptions.

Lifetime gifts generally work differently. The recipient typically takes the donor’s existing basis.

Consider someone who purchased an investment many years ago for $100,000 that is now worth $500,000. Whether that asset is gifted during life or inherited after death could result in very different capital-gains consequences for the recipient.

That’s one reason transfer decisions shouldn’t be based solely on the annual gift-tax exclusion or the federal estate-tax exemption. Taxes, cash-flow needs, control, risk and the family’s broader financial objectives should all be considered.

Turning an Inheritance Into a Planning Conversation

You don’t have to know exactly what you’ll inherit—or what your estate will eventually be worth—to begin preparing.

A good starting point is simply having conversations.

Start with location. Where are your parents or grandparents legally domiciled? Do they own real estate or other property in another state? These details can help determine whether state estate or inheritance taxes could potentially apply.

Review your own estate plan as your wealth grows. If you’re accumulating wealth through a business, equity compensation, investments or real estate, periodically review beneficiary designations, account ownership and titling. Marriage, divorce, births, deaths, significant asset appreciation and other major life events can all create reasons to revisit an existing plan.

Prepare before receiving an inheritance when possible. An inheritance can create financial decisions at an already emotional time. Coordinating with financial, tax and legal professionals beforehand can make it easier to understand cost basis, evaluate distribution options and determine how inherited assets fit into your existing financial plan.

Perhaps most importantly, don’t assume that estate planning is simply about minimizing taxes.

A well-designed estate strategy can also address questions such as:

Who should receive your assets? How should they receive them? Who should make financial or medical decisions if you’re unable to? How should a family business transition? And how can wealth support the people and causes that matter to you?

Estate and inheritance taxes are only part of that larger conversation.

The distinction between the two, however, is important. Estate taxes and inheritance taxes apply to different taxpayers, operate under different rules and may be imposed by different jurisdictions.

With a $15 million federal basic exclusion amount in 2026, many families may never encounter the federal estate tax. But lower state thresholds, inheritance taxes and the complexity of transferring appreciated assets mean estate planning can remain relevant well below that level.

As more wealth moves from one generation to the next, understanding the rules before a transfer occurs can give families more time to ask questions, coordinate with their advisors and make informed decisions.