“To paraphrase Mark Twain: reports of the death of state estate taxes are greatly exaggerated. In fact, there are recent signs that states are starting to beef up their estate tax laws, instead of tearing them down. This, of course, is bad news for wealthier Americans, who had hoped that state lawmakers would continue burying these taxes.”
The good news is that most states don’t have their own death taxes. Those that do typically have a higher exemption amount than in the past.
Kiplinger’s recent article entitled “State Estate Taxes Not Dead Yet” advises you not to hold your breath waiting for your state’s estate tax to be repealed. Instead, you might be able to avoid the tax with the help of an experienced estate planning attorney.
In 2000, every state and DC had an estate tax on the books. With the federal estate tax law permitting a dollar-for-dollar credit for up to 16% of state estate and inheritance taxes paid, it seemed like a good idea. This let states impose their own estate taxes, without adding to the tax burden of their residents.
However, this changed in 2001 when a new law gradually eliminated the federal credit (and completely repealed it in 2005). Consequently, if a state wanted to impose an estate tax, it meant “extra” taxes on its resident estates, in addition to the federal estate tax they were required to pay. Even so, more than 20 states decided to eliminate their own taxes out of fear that wealthy residents would flee because of the added tax burden. This resulted in a wave of estate tax repeal measures in many states.
Now, there are only 12 states and DC that still impose the tax. There is some positive news for those people in that estate-tax exemption amounts are rising in 2020 in half the states with the tax.
Even if you escape state estate taxes, your heirs still might be subject to state inheritance taxes. Estate taxes are paid by the estate and are based on the estate’s overall value, in contrast, inheritance taxes are paid by an individual heir on whatever property they are given.
Six states currently have an inheritance tax—Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
Even if there’s an inheritance tax on the books in your state, some of your relatives who inherit your property still might not have to pay it. Typically, your closest relatives will be exempt from the tax when you pass away, but your more distant family members probably won’t have that perk. For example, in Iowa, a decedent’s spouse, parents, children, and grandchildren are exempt from paying the state’s inheritance tax. However, other heirs, like nieces, nephews, uncles, aunts, and non-relatives, are required to pay. In addition, state inheritance tax rates can also be higher for distant relatives or for more valuable property. Take Nebraska, for instance, where the inheritance tax on heirs who are immediate relatives is only 1% and doesn’t apply to property that’s worth less than $40,000. However, remote relatives must pay a tax rate of 13%. Their exemption amount is only $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.
Reference: Kiplinger (Feb. 3, 2020) “State Estate Taxes Not Dead Yet”