Colorado does not impose an inheritance tax on beneficiaries who receive money or property after someone’s passing. Only federal rules and ordinary state income tax may apply, depending on the situation.
Why Is There No Inheritance Tax in Colorado?
The person receiving the assets pays an inheritance tax, not the estate itself. Different states structure these taxes in their own way. Some tax distant relatives or non-relatives more heavily, while exempting spouses or children. Colorado stands out because it has no active inheritance tax, which simplifies the process for many families.
The History
However, the state has not always kept things this simple.
1927: Colorado adopted an inheritance tax, which meant certain beneficiaries owed tax on what they received. Over time, this system became harder to administer and less aligned with federal rules.
1980: The state repealed its inheritance tax and replaced it with a state estate tax instead, shifting the tax burden from beneficiaries to the estate itself.
That estate tax was tied to a federal credit that used to reward states for imposing such a tax. When federal law phased out that credit for people passing after December 31, 2004, Colorado’s estate tax effectively ended as well. The key takeaway: both the old inheritance tax and the later estate tax are now dormant.
Why There’s No Inheritance Tax in Colorado Today
Several factors help explain why there’s no inheritance tax in the state now:
- Lawmakers chose not to create a new, stand-alone inheritance tax after the old system went away.
- Colorado has a long-standing culture of limiting new or higher taxes.
- The federal system already collects estate tax from only the largest estates, which reduces pressure for a separate state inheritance tax.
For most families, this means beneficiaries do not pay a separate inheritance tax in Colorado. Planning still matters, though, especially around federal estate tax thresholds, income tax on estates and trusts, and how different assets pass on.
What This Means for Colorado Families
Colorado’s probate laws govern how property transfers to heirs and beneficiaries without imposing additional inheritance taxes. When someone dies intestate, their estate passes to heirs as prescribed by the probate code. Surviving spouses receive their intestate share directly, and other heirs receive their portions without tax burden on the inherited property.
Property can also pass outside probate through nonprobate transfers to spouses and other beneficiaries without inheritance tax implications. This includes assets like life insurance, retirement accounts, and property held in trust.
While Colorado families avoid state inheritance taxes, they still face the time and costs of probate court proceedings. Creating a comprehensive estate plan with tools like a last will and testament helps ensure assets transfer according to your wishes. For families looking to avoid probate entirely, living trusts provide a way to transfer assets directly to beneficiaries without court involvement, saving both time and the typical probate costs of 3-7% of the estate value.
(Read More: Learn about revocable trusts in Colorado versus Nevada and the cost of probate in Colorado.)