Inheritance taxes, also known as taxes on transferred property, are federal taxes that your heirs must pay when they receive your assets.
The tax rate varies by state and also depends on whether you are a citizen, resident, or foreigner.
Who Must Pay Inheritance Tax in the United States?
Citizens
For U.S. citizens, the inheritance tax applies to all assets they own worldwide, regardless of the country in which they are located.
One of the most significant advantages for citizens is the unlimited marital deduction. This means you can transfer any amount of money or property to your spouse without any inheritance tax being applied. For example, if you transfer billions or trillions to your spouse, no taxes will be paid. However, the children will have to pay these taxes when the second spouse dies.
Currently, there is an exemption of $12,060,000 for citizens. This means that up to this amount, no inheritance tax is paid. If there is no spouse, the children must pay these taxes immediately. However, it’s important to note that this exemption will change on January 1, 2026, decreasing to between $6 and $7 million. This implies that if you have more than the exemption in 2026, your heirs will have to pay taxes on the amount that exceeds the exemption.
The maximum inheritance tax rate is 40%. For example, if you are set to inherit $10,000,000 in 2026 and the exemption is $7,000,000, your heirs will have to pay 40% on the remaining $3,000,000, which amounts to $1,200,000. To protect your family from this financial burden, you might consider purchasing life insurance through an irrevocable trust to cover these costs.
Residents
Like citizens, residents are subject to taxes on all assets they own worldwide. This is reported through IRS Form 706.
No Marital Deduction: Unlike citizens, residents do not have an unlimited marital deduction. However, they can use a “Qualified Domestic Trust” (QDOT) to defer tax payments. This trust allows for an extension of tax payments but does not offer the same unlimited exemption that citizens have.
The maximum inheritance tax rate for residents is also 40%. It is crucial to plan properly to avoid financial difficulties for your heirs. I know someone who had to pay $1,200,000 in property taxes after her husband’s death, which forced her to sell the property to cover the costs.
Non-Residents
For non-residents, the exemption is significantly lower, only $60,000. This means that any amount exceeding this exemption will be subject to taxes.
Like residents, non-residents do not have a marital deduction. This means the entire inheritance is subject to taxes without any exemption for the surviving spouse. The maximum inheritance tax rate for non-residents is also 40%.
It is crucial that non-residents plan ahead to mitigate this tax impact and ensure their heirs do not face unexpected financial difficulties.
Inheritance tax in the United States varies significantly depending on your status as a citizen, resident, or non-resident. It is essential to understand the differences and plan accordingly to protect your heirs from significant tax burdens. If you want to learn more, visit my YouTube channel, and don’t forget to follow me. Click here.