No, the estate tax and the generation-skipping transfer tax (GSTT) are not the same; they are separate, complementary federal taxes. While the estate tax applies to assets transferred upon death to any beneficiary, the GSTT is an additional 40% tax levied on transfers to recipients at least two generations younger (e.g., grandchildren) to prevent bypassing generational taxes.
How do the estate, gift, and generation-skipping transfer taxes work? The federal estate tax applies to the transfer of property at death. The gift tax applies to transfers made while a person is living. The generation-skipping transfer tax is an additional tax on a transfer of property that skips a generation.
The GST tax is separate from, and in addition to, the estate tax. The tax is currently calculated at a flat rate of 40% (equal to the estate and gift tax rate) on transfers above the lifetime estate and gift tax exemption amount, which in 2026 is $15 million per individual.
The main difference is who pays the tax: an estate tax is paid by the deceased's estate before assets are distributed, levied on the total value of the estate, while an inheritance tax is paid by the beneficiaries (heirs) on the assets they receive, based on their share and relationship to the deceased. The U.S. has a federal estate tax (not inheritance), but only a few states impose an estate tax, while some states impose an inheritance tax instead.
A tax on death and on lifetime transfers that was introduced in 1894 to replace probate duty. Estate duty was eventually replaced by capital transfer tax in 1974/75 and, subsequently, by inheritance tax.
Who pays the estate tax? The government charges federal estate tax on the value of the assets less expenses within the estate. Federal and state estate taxes must be paid from the assets of the estate, before the remaining assets can be distributed to you as an heir or to your heirs.
In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate. It's a progressive tax, just like the federal income tax system. This means that the larger the estate, the higher the tax rate it is subject to.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
The tax is paid by the estate itself before assets are distributed to heirs. , which has a top marginal rate of 40 percent, 12 states and the District of Columbia impose estate taxes, while five states levy inheritance taxes. Maryland is the only state that imposes both an estate and an inheritance tax.
The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate."
In order to avoid the generation-skipping transfer tax on the initial transfer, an individual must use (allocate) some or all of one's GSTT exemption. The GSTT exemption may be used for both outright transfers as well as transfers in trust.
The three year rule affects certain gifts and transfers made within three years of death. Here's a straightforward breakdown: If you transfer certain assets or give up control over them within three years of your death, those assets might be included in your estate for tax purposes.
The new law will increase the estate tax exemption to $15 million for single people and $30 million for couples in 2026 and allow it to rise with inflation moving forward. In other words, a couple will be able to leave $29.99 million to their heirs in 2026 without paying a cent of estate tax.
Bypassing a generation can, in some cases, reduce the overall inheritance tax liability for a family. For example, if the children's own estates are already substantial, passing money directly to grandchildren may avoid compounding tax liabilities in future.
The "worst" states for estate taxes often include Washington, for its high top rate (35%) and unique calculation method; Maryland, because it has both an estate and inheritance tax, potentially reaching a combined 26%; and Oregon, for its low $1 million exemption and inclusion of life insurance in taxable value, making even modest estates vulnerable. Other states like New York, Massachusetts, and Hawaii also pose challenges due to high rates or low thresholds for certain estates.
Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due.
You can gift your children as much money as you'd like, but you need to keep in mind that your gift may not be tax-free depending on the amount and circumstances.
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.