Inheritance tax from another state comes into play only when you inherit real estate or tangible personal property physically located in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania. Those are the five states that still levy this tax, and each applies it to in-state physical assets even when the deceased lived somewhere else entirely.1Tax Foundation. Estate and Inheritance Taxes by State What you owe depends on your relationship to the deceased, the value of the in-state property, and the specific state’s rules. If none of the property sits in one of those five states, there is no out-of-state inheritance tax to worry about.
One boundary worth stating up front: inheritance tax is different from estate tax. Estate tax is paid by the estate before distribution and is the executor’s problem. Inheritance tax is paid by you, the person receiving the property. Maryland is the only state that imposes both.1Tax Foundation. Estate and Inheritance Taxes by State
What Kind of Out-of-State Property Is Actually Taxed
The concept that controls everything here is situs, meaning where the asset is physically located. A state can tax a non-resident’s estate only on assets situated within its borders. Real property and tangible personal property sit wherever they physically sit: a vacation house, undeveloped land, a vehicle registered in the state, valuable personal items kept at a property there.
Intangible assets follow the deceased person’s home state instead. Stocks, bonds, bank accounts, and retirement funds are not taxed by a state just because the company or bank is located there. A non-resident who owned stock in a New Jersey-incorporated company would not owe New Jersey inheritance tax on those shares.2Legal Information Institute. New Jersey Administrative Code 18:26-6.5 – Intangible Property of a Nonresident The same person’s beach house in New Jersey, though, triggers a filing.3New Jersey Division of Taxation. Transfer Inheritance Tax Non-Resident Return
So the first question is not what state the deceased lived in. It’s what physical property they owned inside one of the five inheritance tax states.
Rates by State
Every inheritance tax state sets rates based on how closely you were related to the deceased. Spouses and close family generally pay little or nothing. Distant relatives and unrelated heirs pay the most.
Pennsylvania
Pennsylvania uses flat rates:4Pennsylvania Department of Revenue. Inheritance Tax
- Surviving spouse, or parent inheriting from a child age 21 or younger: 0%
- Direct descendants and lineal heirs: 4.5%
- Siblings: 12%
- All other heirs: 15%
Property owned jointly between spouses is fully exempt. Certain agricultural land transferred to eligible recipients is also exempt for deaths after June 30, 2012.4Pennsylvania Department of Revenue. Inheritance Tax For non-resident decedents, Pennsylvania taxes only real property and tangible personal property located within the state.
New Jersey
New Jersey fully exempts Class A beneficiaries: spouses, children, grandchildren, and parents. Everyone else falls into graduated brackets:5New Jersey Division of Taxation. Inheritance Tax Rates
- Class C (siblings, children-in-law): no tax on the first $25,000, then 11% to 16% above that, topping out at 16% over $1,700,000
- Class D (all other heirs): 15% on the first $700,000, then 16% above that, with no initial exemption
A friend inheriting a $500,000 shore house pays 15% on the entire value.
Kentucky
Kentucky fully exempts Class A beneficiaries (spouses, parents, children, grandchildren, and siblings). The remaining classes face graduated rates:6Kentucky Department of Revenue. Inheritance and Estate Tax
- Class B (nieces, nephews, children-in-law, aunts, uncles): $1,000 exemption, then 4% to 16%
- Class C (all other heirs): $500 exemption, then 6% to 16%
Maryland
Maryland charges a flat 10% on taxable transfers. Exempt beneficiaries include spouses, children, grandchildren, parents, grandparents, siblings, stepchildren, spouses of the deceased’s children, and registered domestic partners. Charities and government entities are also exempt.7Maryland Register of Wills. Inheritance Tax The 10% applies to nieces, nephews, cousins, friends, and unmarried partners who aren’t registered.
Maryland exempts personal property of a non-resident except for tangible property physically located in Maryland. Furniture, vehicles, or other physical items kept there are taxable. Bank accounts and investments are not.
Nebraska
Nebraska’s rates:
- Immediate family (children, parents, siblings): 1% on amounts exceeding $100,000
- Distant relatives (aunts, uncles, nieces, nephews): 11% on amounts exceeding $40,000
- Unrelated heirs: 15% on amounts exceeding $25,000
Nebraska administers the tax at the county level, which is unusual and can create logistical difficulties for out-of-state executors who need to file with the county court where the property sits.
How the Bill Is Actually Calculated for Non-Residents
Non-resident inheritance tax is usually not a straight percentage of the in-state property’s value. Most of these states prorate the tax based on how much of the total estate the in-state property represents.
New Jersey is a typical example. The state first calculates what the tax would be if the deceased had been a New Jersey resident and the entire estate had been in-state. It then multiplies that theoretical figure by the ratio of New Jersey property to the total worldwide estate.8Legal Information Institute. New Jersey Administrative Code 18:26-2.15 – Ratio Tax on Transfer of Nonresident
Say a non-resident dies with a $2,000,000 total estate, including a $200,000 New Jersey rental property left to a nephew. New Jersey computes the tax as if the full $2,000,000 were in-state, then applies 10% of that figure, because the New Jersey property is 10% of the estate. This usually produces a lower bill than taxing the in-state property directly.
New Jersey carves out an important exception. If the deceased specifically left the New Jersey property to a named person in the will (a specific devise), the property is taxed directly to that beneficiary at full resident rates instead of going through the proration formula.8Legal Information Institute. New Jersey Administrative Code 18:26-2.15 – Ratio Tax on Transfer of Nonresident Depending on the numbers, this can produce a higher bill than proration would.
Kentucky prorates exemptions for non-residents based on the proportion of Kentucky property to the total estate.9Kentucky Department of Revenue. A Guide to Kentucky Inheritance and Estate Taxes
Deadlines and Penalties
Each state runs on its own clock:
- New Jersey: 8 months after the date of death10New Jersey Division of Taxation. IT-R Instructions
- Pennsylvania: 9 months after the date of death4Pennsylvania Department of Revenue. Inheritance Tax
- Nebraska: 12 months after the date of death11Nebraska Legislature. Nebraska Revised Statute 77-2010
- Kentucky: 18 months after the date of death9Kentucky Department of Revenue. A Guide to Kentucky Inheritance and Estate Taxes
- Maryland: the Register of Wills calculates the tax and sends an invoice; payment is due within 30 days7Maryland Register of Wills. Inheritance Tax
Filing extensions are sometimes available, but they usually don’t extend the payment deadline. Interest starts accruing on any tax owed but unpaid by the original due date. Nebraska is particularly aggressive: failing to file within 12 months triggers a penalty of 5% per month on the unpaid balance, up to a maximum of 25%.11Nebraska Legislature. Nebraska Revised Statute 77-2010 Maryland imposes a 10% penalty plus interest if payment isn’t made within 30 days of the invoice.7Maryland Register of Wills. Inheritance Tax
Each state has its own form specifically for non-resident decedents, and most filings still go in by mail with all supporting schedules and full payment.
The Lien Problem
Until the inheritance tax is paid, the state typically holds a lien on the property. That lien blocks any clean sale, refinance, or title transfer of the inherited real estate. Ignoring the filing and dealing with it later at closing rarely works.
To clear the lien, you file the non-resident inheritance tax return, pay the calculated amount, and obtain a tax waiver or lien release from the state. Only after the state issues that clearance can the property be conveyed with clean title. Processing times vary, and delays are common. Executors who wait until a sale is close to closing to start this process routinely run into problems.
Ways to Reduce or Avoid It
The most common planning move is converting the out-of-state real property into intangible property before death. If the owner transfers a vacation home or rental into a limited liability company, what they own is no longer real estate in another state. They own an LLC membership interest, which is intangible personal property that follows their home state. Because intangible property of a non-resident is generally exempt from inheritance tax, the LLC structure removes the property from the taxing state’s reach.
This is the same principle that keeps an out-of-state bank account outside inheritance tax while an out-of-state house is inside it. The account is intangible, the house is not, and an LLC makes the house look like an account for situs purposes.
Revocable trusts are often suggested here, and they do help with the separate problem of ancillary probate on out-of-state real estate. But a revocable trust on its own may not eliminate inheritance tax, because the trust assets are still included in the deceased person’s estate for tax purposes. The LLC is the tool aimed directly at the inheritance tax question. Some plans combine both: the LLC holds the property, and a trust holds the LLC interest.
These structures cost money to set up and maintain, including formation fees, annual reporting, and possible effects on property tax exemptions or mortgage terms. For a single modest property left to close family who would pay little or nothing anyway, the planning costs can exceed the tax savings. The strategy makes sense mainly for higher-value properties or beneficiaries who fall into the more heavily taxed classes.