When Does a Spouse Pay Inheritance Tax?
Clarify whether a surviving spouse owes tax on inherited assets. Explore the key factors influencing tax treatment across different jurisdictions.
When a spouse passes away, questions often arise about whether the surviving spouse will face an inheritance tax. The answer depends on several factors, including the type of tax involved and the citizenship of the surviving spouse. Understanding these distinctions is important for grasping how assets are treated after death.
Understanding Inheritance and Estate Taxes
Confusion frequently arises between inheritance tax and estate tax, though they represent distinct concepts. An estate tax is a levy on the total value of a deceased person’s assets before they are distributed to heirs. This tax is paid by the estate itself, with the executor responsible for filing the necessary returns and remitting the tax. The U.S. federal government imposes an estate tax.
In contrast, an inheritance tax is imposed directly on the beneficiaries who receive assets from an estate. This tax is paid by the individual heir, and the amount can vary based on the value inherited and their relationship to the deceased. Only a few states currently levy an inheritance tax. The fundamental difference lies in who is responsible for paying: the estate for an estate tax, and the beneficiary for an inheritance tax.
Spousal Treatment Under Federal Estate Tax
Under federal law, assets transferred to a surviving U.S. citizen spouse generally qualify for the unlimited marital deduction. This provision allows an individual to transfer an unrestricted amount of assets to their U.S. citizen spouse, either during their lifetime or at death, without incurring federal estate or gift tax. The purpose of this deduction is to defer federal estate tax until the death of the second spouse.
The federal estate tax exemption amount is $13.99 million per individual for deaths in 2025. Due to the unlimited marital deduction, most estates do not owe federal estate tax upon the first spouse’s death, as assets passing to the surviving U.S. citizen spouse are excluded from the taxable estate.
Spousal Treatment Under State Inheritance Taxes
A limited number of states levy an inheritance tax. As of 2025, these states include Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa is phasing out its inheritance tax entirely for deaths occurring on or after January 1, 2025. If a deceased person lived in one of these states or owned property there, an inheritance tax might be due.
In every state with an inheritance tax, surviving spouses are entirely exempt from paying this tax on inherited assets. While tax rates and exemptions vary for other beneficiaries based on their relationship to the deceased, spouses are universally spared from this state-level tax.
Non-Citizen Spouses and Tax Considerations
The unlimited marital deduction, which allows for tax-free transfers between spouses, has a notable exception when the surviving spouse is not a U.S. citizen. To prevent assets from leaving the U.S. tax system without being subject to estate tax, the unlimited marital deduction generally does not apply to transfers to non-citizen spouses. This means that assets transferred to a non-citizen spouse could be subject to federal estate tax upon the death of the U.S. citizen spouse.
To address this, a Qualified Domestic Trust (QDOT) can be established. A QDOT allows the estate tax on assets passing to a non-citizen spouse to be deferred until the non-citizen spouse’s death or until principal distributions are made from the trust. For a trust to qualify as a QDOT, specific requirements must be met, including having at least one U.S. citizen or domestic corporation as a trustee, and an election must be made on the deceased spouse’s federal estate tax return. Income distributed from a QDOT to the surviving spouse is subject to income tax, but principal distributions are typically subject to estate tax unless made for hardship reasons.