How can you avoid paying inheritance tax?

Inheritance tax rates are determined by the type of property that has been inherited, and by the relationship of the beneficiary to the decedent (the person who died). If you are in line for an inheritance, check if you are eligible for an inheritance tax exemption. This works in a similar way to the federal income tax system in that you can also apply for tax deductions.

Different U.S. states vary in their legislation regarding inheritance tax exemptions but certain principles are common to all. A surviving spouse gets the biggest tax break -- he or she doesn't have to pay any inheritance tax at all. Lineal descendents or ancestors (in other words, the parents or children of the decedent) pay the least inheritance tax.


Other family members, such as siblings of the decedent, have to pay slightly more. In the state of Pennsylvania, any close family heirs can claim a $3,500 tax exemption. Non-family members usually have to pay the most inheritance tax. If an organization or a charity receives money or assets, different tax rates apply. In Pennsylvania for example, charities don't have to pay any inheritance tax at all on money or property bequeathed to them.

Non-spouse heirs can reduce the amount of inheritance tax they need to pay if the value of the inheritance is lower than the state's minimum tax threshold. To avoid heirs having to pay heavy inheritance taxes, some estate planners create trusts upon death, so that the decedent bequeaths some money to charity, in addition to bequeathing to his/her children amounts of money that are equivalent to the tax threshold, and the rest to the surviving husband or wife.

If you suddenly come into some money, check out if the decedent already paid taxes on the property bequeathed to you. If he/she did, you may be exempt from additional taxes. Insurance benefits, such as from life insurance, are tax free.