When it comes to transferring wealth, estate taxes can make a bigger dent than many people expect. For families with real estate, investment accounts, or business assets, the size of an estate can add up quickly, and so can the taxes that come with it.

Even if you don’t consider yourself wealthy, understanding how estate tax rules work and what planning options are available is worthwhile. The rules aren’t static. What doesn’t apply to your situation today might apply in the near future, particularly as exemption thresholds evolve and valuations increase.

A well-organized plan can make a meaningful difference, not just in reducing your potential tax burden, but in giving you more control over how your assets support the people and causes that matter to you. The better grasp you have on the rules and potential pitfalls, the more clearly you’ll be able to shape the legacy you want to leave behind.

Does Colorado Have an Estate Tax?

Colorado does not impose an estate tax. This places it among the growing number of states that have either repealed or never implemented such a tax at the state level.

Here are the places that do impose their own estate tax:1

Hawaii
Oregon
Minnesota
District of Columbia
Rhode Island
Illinois
Washington
Maine
Maryland
Vermont
Connecticut
Massachusetts
New York

Just because Colorado doesn’t levy its own estate tax doesn’t mean residents are entirely off the hook. If you own property or other tangible assets in a state that does, your estate may still be subject to that state’s tax rules. Real estate, in particular, can create exposure if it’s located in a jurisdiction with its own estate or inheritance taxes.
Residency can also complicate matters. If you split time between homes in different states or plan to retire elsewhere, it’s worth reviewing how that may affect your estate’s future. Tax rules are often determined by where you live and where your property is located — and they don’t always align.

Lastly, Colorado residents must still account for federal estate taxes if their estate exceeds the exemption threshold, even without a state-level tax. For high-net-worth families, understanding how those federal rules work and how to plan around them is a key part of protecting what you pass down.

How Federal Estate Tax Works

Federal estate taxes kick in when the total value of someone’s estate surpasses a specific threshold at the time they pass away. Whether your estate is taxed depends on the total value of what you own and how those assets are structured. Here’s a breakdown of how it works:

What’s Included in a Taxable Estate:

Your taxable estate includes more than just real estate or investment accounts. It may also factor in life insurance proceeds, business interests, retirement accounts, vehicles, collectibles, and even debts owed to you. Everything you own or control at the time of death contributes to the overall value. That said, there are several estate planning strategies (see the “Reducing Your Estate’s Tax Exposure: Proven Techniques” section below ) that can be used to remove assets from your taxable estate and lessen your overall tax liability.

How to Calculate Estate Value:

To determine if your estate may be subject to federal tax, start by adding up the total value of your assets. Then, subtract allowable deductions, such as debts, funeral expenses, and gifts to charity. The resulting amount is your taxable estate. Working with professionals such as estate attorneys, CPAs, and financial advisors can help you estimate your estate’s value accurately and avoid miscalculations that could lead to unexpected taxes.

Current Federal Exemption and Tax Rates:

The 2025 federal estate tax exemption is $13.99 million per individual, or $27.98 million for married couples. Any amount above the exemption is subject to a progressive estate tax rate that starts at 15% and goes to 40%.2

Please Note: The current exemption level is temporary. If Congress doesn’t intervene, the exemption is set to shrink by roughly half starting January 1, 2026, impacting estates worth around $7 million or more per individual, adjusted for inflation. For families nearing that limit, planning ahead can help reduce exposure and provide more clarity around future obligations.3

Estate Tax vs Inheritance Tax: What’s the Difference?

Inheritance taxes and estate taxes are two separate systems, and it’s helpful to understand how they apply, especially if you expect to pass on or receive substantial assets.

Estate tax is taken directly from the estate and is calculated based on the combined value of all assets the person owned at the time of death. This tax is calculated before any distributions are made, and the estate is responsible for paying it.

Inheritance tax, by contrast, is the responsibility of the individual who receives the inherited assets. The tax is based on the amount inherited and, in some states, the heir’s relationship to the person who passed away.

Only a few states impose an estate tax, and even fewer apply an inheritance tax. Still, the distinction matters. If you own property or inherit assets across state lines, different tax rules can apply depending on where those assets are located or where the decedent lived.

Understanding which taxes apply and who is responsible for paying them can help prevent confusion during an already emotional time. Taking steps to clarify this distinction during the planning process can save time, stress, and potentially a significant amount of money for you and your beneficiaries.

Is There an Inheritance Tax in Colorado?

No, Colorado does not levy an inheritance tax either. This means that beneficiaries receiving money or property from someone who lived and died in Colorado will not owe state-level tax on that inheritance.

Here are the states that currently impose an inheritance tax:4

Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

Even if you reside in Colorado, receiving an inheritance from someone in one of these states — or owning assets located there — could subject you or your estate to those states’ rules. These taxes can apply even if you never lived there personally.

In states that do apply inheritance taxes, the rules often vary based on your relationship to the person who passed. Immediate family members may be exempt or subject to lower tax rates, while extended relatives may be taxed more heavily. This tiered approach can lead to different outcomes depending on your family structure and how assets are passed.

Understanding how these rules interact with your own estate, especially if your assets cross state lines, is an important part of minimizing confusion and preparing your heirs for what to expect.

Reducing Your Estate’s Tax Exposure: Proven Techniques

There are many ways to reduce the portion of your estate that may be subject to federal taxes. The right mix of strategies depends on the size of your estate, your family situation, and what you want to accomplish with your legacy.

Here are some of the most widely used techniques:

Annual Gift Tax Exclusion:

Each year, you can give up to a set amount — currently $19,000 per person in 2025 — to as many individuals as you like without triggering gift tax reporting.5 This strategy can gradually move wealth out of your estate while keeping things simple.

Lifetime Gift Tax Exemption:

The lifetime gift exemption lets you give more than the annual limit without paying gift tax, as long as the total stays under your combined lifetime and estate tax limit. It’s a way to transfer larger assets — like property or business shares — during your life. Any amount you use now counts against what you can pass on tax-free later. For 2025, the lifetime gift tax exemption is $13.99 million per person.

Irrevocable Trusts:

Transferring assets into an irrevocable trust can exclude them from your taxable estate, helping you preserve wealth and set terms for how it’s passed to future generations. These trusts can be tailored to address specific goals, including generational transfers, charitable intentions, or special needs planning. For example, irrevocable life insurance trusts (ILITs) can be used to hold life insurance policies outside your estate, preventing the death benefit from being included in your estate’s value while still providing liquidity to cover estate taxes or other expenses.

Charitable Giving:

Giving to eligible charities can lower the value of your taxable estate and allow you to contribute to organizations you care about. These contributions can be made during your lifetime or included in your estate plan to take effect later. Depending on your goals, tools like donor-advised funds, charitable trusts, or private foundations may offer added flexibility, tax advantages, and a more structured way to give, especially for those with larger estates or long-term philanthropic plans. The right approach depends on your personal objectives and circumstances.

Family Limited Partnerships (FLPs):

These structures are often used to manage and transfer closely held business interests or real estate among family members. When structured properly, FLPs may offer valuation discounts and provide long-term benefits for succession.

Direct Payments for Medical or Education Expenses:

You can pay someone’s tuition or medical bills directly, without using your annual exclusion or lifetime exemption. What matters most is directing the payment to the service provider or institution itself, not to the person benefiting from it.

Estate Tax FAQs for Colorado Residents

1. What happens if my estate is over the federal exemption limit?

If your estate exceeds the federal exemption — currently $13.99 million per person — the amount above that threshold may be taxed at a federal estate tax rate between 18% and 40%.

For 2025, here’s how your estate will be taxed if you cross the threshold:6

18% on the first $10,000 of taxable estate value above the exemption
20% on amounts between $10,001 and $20,000
22% on amounts between $20,001 and $40,000
24% on amounts between $40,001 and $60,000
26% on amounts between $60,001 and $80,000
28% on amounts between $80,001 and $100,000
30% on amounts between $100,001 and $150,000
32% on amounts between $150,001 and $250,000
34% on amounts between $250,001 and $500,000
37% on amounts between $500,001 and $750,000
39% on amounts between $750,001 and $1 million
40% on all taxable estate value over $1 million

2. Can owning out-of-state property affect my Colorado estate?

Yes. Property held in other states may be subject to that state’s probate process or estate and inheritance taxes, regardless of your Colorado residency.

This includes real estate, tangible personal property, or business holdings located outside Colorado. These assets can trigger additional paperwork, tax obligations, or legal complexity for your heirs. That’s why multi-state ownership calls for a careful estate plan tailored to every place where you own significant assets.

3. Can I avoid estate taxes by giving money to my kids now?

Giving assets away while you’re alive can shrink your taxable estate, but how you do it makes a big difference. Small gifts within the annual gift tax exclusion typically don’t require reporting, while larger gifts apply against your lifetime gift tax exemption.

It’s also important to consider how gifting fits within your overall goals. Transferring significant assets too soon might cause cash flow issues or leave you exposed in retirement. A thoughtful plan should balance both present needs and future estate impact.

4. How does the step-up in basis work for inherited assets?

A step-up in basis updates the value of an inherited asset to its market value at the time of the original owner’s death. This change effectively wipes out any gains that were built up during the owner’s lifetime. Because of this reset, heirs who sell the asset soon after inheriting typically face minimal or no capital gains tax.

The step-up is one of the most effective ways to reduce long-term income tax exposure when transferring appreciated assets like real estate or investment accounts.

5. What happens to capital gains taxes when I sell inherited investments or property?

If you sell inherited assets, you’ll generally be taxed on the gains that occur after the date you inherited them. How much tax you’ll pay depends on your asset’s holding period and the tax laws in your state.

Federally, profits from assets held for under a year are taxed like regular income, while those kept longer usually qualify for reduced rates of 0%, 15%, or 20%, based on your income level. In Colorado, capital gains are taxed at a flat 4.4%, regardless of how long you’ve held the asset or how much it has appreciated.7

Selling soon after inheritance typically results in minimal tax liability, but holding onto the asset could trigger more tax exposure down the road. Knowing your adjusted basis and understanding how both state and federal rules apply can help you decide when and how to sell.

6. Can I still be taxed if I inherit assets through a trust?

Yes. While trusts are often used to manage and direct asset transfers, not all trusts remove those assets from the taxable estate.

The structure and terms of the trust determine whether the assets inside are excluded or still count toward the estate’s total value. That’s why reviewing trust language with an estate attorney or tax professional is an important step in clarifying what’s covered and what’s not.

We Can Help You Manage Your Estate Taxes

Even though there’s no estate tax at the state level in Colorado, federal estate tax rules can still affect how much of your wealth ultimately reaches your loved ones. If you’ve accumulated real estate, business interests, or other valuable assets, planning how those are passed on can make a real difference, financially and emotionally.

Tax laws can change substantially over time, and what doesn’t affect you today could become relevant later. That’s why we encourage you to take a proactive approach now, rather than waiting for outside circumstances to dictate your next move. Our team can work alongside your accountant and estate planning attorney — or recommend trusted professionals we collaborate with — to help coordinate a strategy that fits your goals.

We specialize in helping families structure their plans with clarity and intention. Whether you’re just starting the process or reevaluating what you already have in place, we’ll help you develop a plan that aligns with your wishes and supports your future generations.

Working with experienced financial advisors gives you the perspective and guidance to make informed choices. If you’re ready to take the next step, we invite you to schedule a complimentary consultation call with us.

Resources:

Colorado Estate Tax: What Residents Need to Consider

Does Colorado Have an Estate Tax?