Most Americans assume that inheriting a family home is simply a matter of paperwork, maybe some emotions, and then moving furniture around. The reality in 2026 is considerably messier than that. Depending on where your loved one lived, you could be handed a bill that arrives faster than the grief does.
The landscape of death taxes across America has quietly shifted over the past year, with some states dramatically raising rates, others debating sweeping reforms, and a handful keeping rules that can blindside ordinary families with real estate holdings. Here’s what you actually need to know. Let’s dive in.
The Federal Floor Has Risen – But State Rules Are a Whole Other Story
As of January 1, 2026, the federal gift and estate tax exemption amount increased from $13,990,000 to $15,000,000 per person. That sounds like great news for families. This increase was enacted as part of H.R. 1, commonly referred to as the One Big Beautiful Bill Act, which permanently increases the lifetime exemption amounts and provides for annual indexing based on inflation.
The OBBBA only affects federal estate tax rules – state-level estate or inheritance taxes still apply based on local laws. So while Washington D.C. patted itself on the back, millions of families in certain states are still staring down state-level tax bills that haven’t moved an inch. The real danger for ordinary families lies at the state level, where the rules are older, the thresholds lower, and the rates sometimes punishing.
What Exactly Is an Inheritance Tax – and Who Pays It?
Unlike estate taxes, which are paid by the estate before assets are distributed, the inheritance tax is levied on the person who receives the assets, meaning your heirs, not your estate, are responsible for paying this tax. Think of it like this: the estate tax is the exit toll paid by the deceased person’s estate, and the inheritance tax is the entry fee charged to the person receiving the gift.
For someone inheriting a home they did not plan to sell, this can mean coming up with a large check out of pocket within months of a loved one’s passing. That’s a genuinely brutal situation. All five states with an inheritance tax structure their tax such that the rate varies based on the proximity of the bequest recipient to the decedent, giving preferential treatment to close relatives while taxing those further away at higher rates and with lower exemption thresholds.
The 5 States Still Levying Inheritance Taxes in 2026
The five states that levy this charge in 2026 are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa used to be on this list, but Iowa previously had the lowest top inheritance tax rate at only 2 percent in 2024 before eliminating the tax entirely as of 2025. That left just five states, and each one has its own quirks, traps, and exemptions that can catch unprepared families off guard.
Maryland is the only state that has both estate and inheritance tax, so your estate may be taxed first, and then your beneficiaries taxed again. Honestly, that double-taxation structure is remarkable. Kentucky and New Jersey have the highest top marginal inheritance tax rates, each at 16 percent, while Maryland has the lowest top inheritance tax rate at a flat 10 percent, though paired with an estate tax.
Washington State: The Most Dramatic Change of 2025-2026
Washington state levies an estate tax of up to 35 percent on estates of decedents dying on or after July 1, 2025. That new rate is by far the highest estate tax rate in the country, and a substantial bump from the prior top estate tax rate of 20 percent. This change came via SB 5813, and it reshuffled the entire national conversation about where the most expensive places to die actually are.
Washington’s estate tax exemption was raised to $3 million, effective July 1, 2025, and is indexed for inflation – for deaths occurring in 2026, the exemption is $3,076,000. That sounds like a comfortable buffer until you factor in that Seattle-area home values frequently push estates well past that threshold. For large estates, the combined marginal tax rate is a maximum of approximately 61 percent, including 35 percent to the state of Washington and 40 percent federal, assuming a federal estate tax deduction for state estate taxes paid.
Pennsylvania: The Inheritance Tax That Hits Adult Children
In Pennsylvania, transfers to adult children and other direct descendants face a 4.5 percent tax rate, transfers to siblings are taxed at a rate of 12 percent, and transfers to all other heirs pay a 15 percent tax. This is one of the most misunderstood rules in American estate law. Many people assume their kids will inherit a home cleanly, only to discover that the commonwealth still wants a cut.
Transfers to a surviving spouse are fully exempt from inheritance tax in Pennsylvania, and transfers to a child aged 21 or younger are also fully exempt. So a 22-year-old adult child owes taxes on inheriting their parent’s home, but a 20-year-old does not. Any federal adjusted taxable gifts made within 12 months of the decedent’s date of death may also be subject to Pennsylvania inheritance tax.
New Jersey: No More Estate Tax, But Inheritance Tax Survives
New Jersey repealed its estate tax as of January 1, 2018, but an inheritance tax is still in effect in New Jersey. That repeal felt like a win for families at the time. The inheritance tax sticking around, however, is where the sting remains. New Jersey inheritance tax may be imposed depending on the relationship between the decedent and the beneficiary, the value and kinds of the property transferred, and whether the decedent died as a New Jersey resident.
Kentucky and New Jersey share the distinction of having the highest top marginal inheritance tax rates, each at 16 percent. That is not a small number when you’re talking about a family home worth several hundred thousand dollars. Federal adjusted taxable gifts made within three years of the decedent’s date of death are also included in the New Jersey taxable estate.
Kentucky: Close Family Is Safe, Distant Relatives Are Not
Under Kentucky Revised Statute 140.070, close family members don’t pay inheritance tax when someone dies. This includes spouses, children, grandchildren, parents, and siblings. So if you’re a direct descendant inheriting mom’s house in Louisville, you’re likely in the clear. It’s a generous carve-out for immediate family, and it matters enormously.
Class B beneficiaries in Kentucky – which includes nephews, nieces, half-nephews, half-nieces, children-in-law, aunts, uncles and great-grandchildren – have an exemption of $1,000 and are then taxed in ascending brackets with rates ranging from 4 to 16 percent. Inheritance tax applies to all property in Kentucky owned by a resident, and to Kentucky-based property of nonresidents. Even if you don’t live in Kentucky, if the house is there, the tax follows.
Nebraska: Reform Attempted, Reform Failed
Currently, Nebraska beneficiaries pay one of three rates depending on their relation to the decedent – Class 1 (children, parents, siblings) pay 1 percent after a $100,000 exemption, Class 2 (nieces, nephews, aunts, uncles) pay 11 percent after a $40,000 exemption, and Class 3 (non-relatives) pay 15 percent after a $25,000 exemption. Nebraska lawmakers tried to fix this in 2025, and it did not go well.
LB468, introduced by Senator Rob Clements, proposed lowering inheritance tax rates and increasing exemption thresholds, with an original projected fiscal impact of $34 million. A 2025 proposal to reduce rates and exemptions advanced but later stalled, so current rules remain unless new legislation passes. Nebraska is the only state that sends inheritance tax revenue exclusively to counties, with much of it used to fund bridges and roads. That unique funding structure makes reform genuinely complicated.
Oregon and Massachusetts: The Lowest Estate Tax Thresholds in the Nation
Oregon has an estate tax ranging from 10 to 16 percent, with a state exemption of $1 million. Honestly, $1 million sounds like a lot until you realize that a modest house in Portland can easily push an estate toward that threshold. Massachusetts passed legislation in October 2023 to increase its estate tax exemption to $2 million, but currently holds the third lowest estate tax exemption in the country, surpassed only by Oregon and Rhode Island.
In Massachusetts, the estate tax rate varies from 5.6 to 16 percent depending on the overall value of the estate. Rhode Island’s policy remains among the most stringent – even after a scheduled increase takes effect in 2026, estates valued above $1.83 million will be subject to taxation, placing its threshold far below both federal standards and those of several peer states. These are thresholds that catch real working families, not just wealthy dynasties.
Connecticut Goes the Other Way – and the Lesson It Teaches
Connecticut has moved furthest toward matching the federal system. Beginning in 2026, the state’s exemption will mirror the national level at $15 million per individual and $30 million for married couples, with its estate tax capped at a flat 12 percent and applied only above that amount. It’s a sharp contrast to states like Oregon or Rhode Island, and it tells us something important about political will.
Some states have raised their thresholds in an effort to remain competitive, particularly amid concerns that wealthy residents could relocate to states with no estate tax, while others have opted for smaller increases, prioritizing revenue stability over full alignment with federal law. Because these taxes encourage wealthy individuals to move out of state – depriving the state of tax revenue that would have been generated during their lifetimes – many states eliminated their estate taxes following federal law changes in the 2000s. The tension between collecting revenue and keeping residents is very real.
What Families Should Actually Do Right Now
Private clients should review their estate plans to confirm that their plans still reflect their goals and review opportunities for optimal estate and tax planning, particularly if they are domiciled or own property in a state with a state estate or inheritance tax. That’s not just lawyerly advice – it’s genuinely urgent for families with real estate crossing state lines. Where you live and where your property is located can determine whether these taxes apply. A Florida resident with property in Oregon may still trigger estate tax liability in Oregon.
The OBBBA only affects federal estate tax rules, and state-level estate or inheritance taxes still apply based on local laws. Each state has its own set of rules, so it is a good idea to work with professionals who are familiar with local laws. If there is one thing to take away from all of this, it is that federal headlines about exemption increases can mask a very different reality for families living in New Jersey, Pennsylvania, Nebraska, Maryland, or Kentucky right now.
The family home may be the most emotionally loaded asset any of us ever inherit. It is also, in the wrong state, one of the most financially risky. Does your estate plan reflect the state your loved one actually lives in? That question is worth answering before it becomes urgent.
