When planning for retirement, many people envision relaxing in a sunny climate, enjoying a round of golf, and spending quality time with family. However, there’s one crucial factor that can impact your retirement plans significantly—estate and inheritance taxes. These taxes can drain your hard-earned wealth, leaving less for your loved ones or preferred causes. In this blog, we’ll walk you through the essentials of estate and inheritance taxes and how to protect your legacy from unnecessary tax burdens.
Estate Tax vs. Inheritance Tax: What’s the Difference?
Before diving deeper into how these taxes impact your retirement, it’s important to understand the difference between estate tax and inheritance tax:
- Estate Tax: This tax is levied on the entire value of your estate before it is passed on to your heirs. If your estate exceeds a certain threshold, it will be subject to this tax at either the federal or state level—or both.
- Inheritance Tax: Unlike estate tax, inheritance tax is imposed on the recipient of your assets. The tax rate depends on the heir’s relationship to you and the state in which they reside. Some states have no inheritance tax at all, while others impose varying rates.
The critical thing to note is that where you live, and where your heirs live, can affect which tax applies and how much your family may owe.
Federal Estate Tax: What You Need to Know
Current Federal Estate Tax Threshold
As of 2025, the federal estate tax applies to estates valued above $13 million (this figure is adjusted annually for inflation). Only the portion of your estate that exceeds this threshold is taxed.
What the Future Holds
Although the exemption level is high, it’s expected to drop significantly after 2025 unless new legislation is passed. If the exemption decreases, more estates could become subject to the federal estate tax, making it vital to keep your estate plan updated regularly to avoid surprises.
States with Estate Taxes
Not all states impose estate taxes, but some do, and they can have much lower exemption levels than the federal tax. The following states (and the District of Columbia) have estate taxes:
- Connecticut
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
Each state sets its own exemption thresholds, which can be much lower than the federal limit. For instance, states like Massachusetts and Oregon have lower thresholds, meaning you could still owe estate taxes at the state level even if you’re exempt from federal estate taxes.
The rates in these states typically range from 10% to 20%, and they apply to the portion of the estate that exceeds the state’s specific threshold.
States with Inheritance Taxes
While estate taxes are more common, inheritance taxes are rarer, though they can still significantly affect your heirs. The states that currently impose inheritance taxes include:
- Iowa (phasing out by 2025)
- Kentucky
- Maryland (has both estate and inheritance taxes)
- Nebraska
- New Jersey (estate tax eliminated, but inheritance tax remains)
- Pennsylvania
Inheritance tax rates typically vary based on the heir’s relationship to the deceased. For example, children and spouses often pay a lower rate, or no tax at all, while more distant relatives or unrelated individuals may face higher tax rates.
Why Estate and Inheritance Taxes Matter for Your Retirement
As you plan for retirement, estate and inheritance taxes can have a profound effect on how much of your wealth actually reaches your loved ones. Here’s why it’s essential to factor these taxes into your retirement planning:
- Protect Your Legacy: If you want to leave a substantial inheritance for your children or other loved ones, overlooking estate and inheritance taxes can erode a significant portion of your estate.
- Plan for State-Specific Taxes: Moving to a state with no income tax, like Florida, might sound appealing. But it’s important to understand that some states may still impose estate taxes. Florida, for example, does not have an estate tax, but it’s crucial to confirm your specific circumstances with a tax professional.
- Residency Considerations: Simply moving to a new state may not automatically free you from your old state’s tax obligations. In order to establish a new residency, you must meet specific requirements. Without proper residency status, your old state may still try to claim your estate for tax purposes.
How to Protect Your Wealth from Estate and Inheritance Taxes
Here are some effective strategies to help minimize your exposure to estate and inheritance taxes:
- Consult a Tax Professional: An experienced estate planning professional can help you assess your current tax situation, including both federal and state taxes. They can also help you develop strategies to reduce your tax burden.
- Stay Informed About Legislative Changes: Estate and inheritance tax laws are not static. Tax exemptions and rates can change frequently, so it’s essential to stay updated on both federal and state tax policies to ensure your plan is always in compliance.
- Utilize Trusts and Gifting Strategies: Trusts, gifting, and certain insurance products can help reduce the amount of taxable assets in your estate. A well-thought-out gifting strategy or the creation of a trust can significantly lower your tax exposure.
- Review Legal Documents Regularly: When moving states or changing your living arrangements, it’s important to update your legal documents, such as your will, power of attorney, and healthcare directives. These documents should reflect your new state laws and ensure your wishes are honored.
Moving Forward: Creating a Tax-Efficient Retirement Plan
The key to a successful retirement plan is ensuring that your wealth reaches the right people without being unduly reduced by taxes. Before you make any major moves, schedule a consultation with an estate planning expert who can help you craft a personalized strategy based on your estate value, heirs, and desired retirement location.
Retirement should be about enjoying the fruits of your labor, spending time with loved ones, and checking off items on your bucket list—not worrying about excessive taxes. With careful planning and strategic tax minimization, you can secure your legacy and ensure your family gets the most from your hard-earned wealth.
