What the Government Takes Depends on Your Assets, Your State, and How Well You Plan Ahead
When someone dies, taxes may apply to what they leave behind. The two main types are estate taxes and inheritance taxes. Both reduce what your loved ones receive, but they work differently. Understanding how they apply—and how to plan around them—is essential to protecting your wealth and legacy.
Scenario
You’ve worked hard to build wealth through savings, property, or investments. Now you’re wondering: will your family owe taxes after you’re gone? And can you do anything now to prevent that? Here’s what to know.
Estate Tax: Tax on the Total Estate Before Distribution
Key number: The federal estate tax exemption = $15 million per individual
The estate tax applies to the entire estate’s value before heirs receive anything. The IRS and some states collect this tax from the deceased’s estate if the total exceeds a certain threshold.
✔ Pros:
- Only applies to large estates
- Charitable donations and lifetime gifts can lower the taxable amount
✘ Cons:
- Affects estates over $13.92M (federal); some states tax estates over $1M
- Can reduce what heirs receive by up to 40%
Who Needs It:
Anyone with a large estate or who owns property in a state with its own estate tax (like Oregon or Massachusetts).
Who Doesn’t:
Most middle-class Americans with estates below federal or state thresholds.
If you are reviewing types of death taxes that could impact your family’s inheritance, compare annuities for larger portfolios with attention to tax deferral, guaranteed income, legacy design, carrier diversification, and how much liquidity a large allocation gives up.
Helpful Add-on:
Use irrevocable trusts, charitable remainder trusts, or annual gifting to reduce your estate value before death.
Inheritance Tax: Tax on the Person Receiving the Inheritance
Key number: Only 6 states have it—IA, KY, MD, NE, NJ, PA
This tax is charged to the individual receiving the inheritance, not the estate. Whether or not the heir owes taxes depends on their relationship to the deceased and the state’s tax rules.
✔ Pros:
- Spouses and children are often exempt
- Only applies in a few states
✘ Cons:
- Distant relatives and friends can face high rates
- Surprise tax bills for heirs unfamiliar with state laws
Who Needs It:
Heirs in states with inheritance tax, especially if they aren’t immediate family members.
Who Doesn’t:
Spouses and children in most states; anyone inheriting from residents of the 44 states with no inheritance tax.
How to Offset These Taxes with Insurance and Annuities
Life Insurance
A permanent life insurance policy (such as whole or universal life) provides an income tax-free death benefit to your heirs. If set up outside your estate using a trust, it can also avoid estate tax.
✔ Covers final taxes, protects beneficiaries’ inheritance
✔ Proceeds often arrive quickly and privately (bypass probate)
✘ Premiums can be expensive for older applicants or those in poor health
Annuities with Enhanced Death Benefits
Some annuities offer enhanced death benefit riders that increase the payout to your heirs—sometimes locking in market gains or offering guaranteed growth.
✔ Avoid probate, can grow tax-deferred, and provide a bigger legacy payout
✔ Often exempt from inheritance tax (depends on state law)
✘ Fees for the rider can reduce overall returns
Bonus Annuities
These annuities offer an upfront bonus—sometimes 6% to 10%—to boost the contract value. That extra value can be used to offset estate or inheritance taxes.
✔ Immediate boost helps offset future tax losses
✔ Can be structured to provide income for heirs or a lump-sum
✘ Long surrender periods may limit access to funds if not planned properly
Book A Call
Want to make sure your legacy goes to your family—not the IRS or your state? Contact The Annuity Expert’s financial advisors and insurance agents for free quotes and to compare life insurance, annuities with enhanced benefits, and bonus annuities that help reduce the burden of estate and inheritance taxes. No obligations. Just smart planning.
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Questions From Our Readers
What is the tax rate for the estate tax?
The federal estate tax rate is 40% on any estate value that exceeds the lifetime exemption threshold.
How do you calculate estate tax?
Calculate the estate’s gross value, subtract deductions and exemptions, and then apply the federal estate tax rate of 40% on the remaining value over $15,000,000.
Does the US still have an estate tax?
The US still has an estate tax in 2026, with a $15 million exemption per individual.
What is the difference between an estate tax and a gift tax?
The estate tax is a tax on the transfer of property after death, while the gift tax is a tax on the transfer of property during one’s lifetime.
How much money can you gift to a family member without paying taxes?
In 2026, the annual exclusion limit for gift tax is $19,000 per recipient per year.
Do beneficiaries pay tax on gifts?
No, beneficiaries do not pay tax on gifts. The gift tax is typically paid by the person making the gift (i.e., the donor).
Is it better to gift or inherit property?
It depends on individual circumstances, such as tax implications, timing, and personal preferences.
What is the purpose of estate and gift taxes?
The purpose of estate and gift taxes is to generate revenue for the government and prevent the concentration of wealth in the hands of a few individuals or families.
How does the IRS know if you give a gift?
The IRS may know if you give a gift if you report it on your tax return or if the gift exceeds the annual exclusion limit and you file a gift tax return. Additionally, sure gifts may be subject to disclosure rules or trigger other reporting requirements.
What is the IRS estate tax?
The IRS estate tax is a federal tax on the transfer of an individual’s property at death. The tax is calculated based on the estate’s value and is paid by the estate before assets are distributed to beneficiaries.