The average American doesn’t have to worry too much about paying a federal estate tax, as the current federal estate tax exemption is a generous $5.49 million for 2017 and twice that if you are married. But that’s not the only death tax you and your heirs may encounter, depending on where you live or, more accurately, where you die.
MarketWatch’s article, “Here are the 20 most expensive places in America to die,” reminds us that about 20 states and DC have their own estate or inheritance taxes, or both. Some have exemption thresholds below the federal amount. Therefore, if you live in one of these states, you may be exempt from the federal estate tax, but still exposed to a significant state death tax bill.
Are you thinking about moving to avoid state death taxes? If so, think about all the potential tax implications in the new state, starting with the ones that will affect you while you’re still alive. If you decide to move to a lower-tax state, understand the residency requirements: be sure you’re no longer a “legal resident” of your old higher-tax state.
For 2017, 14 states plus DC have their own estate taxes (rather than inheritance taxes). These estate taxes are based on the entire value of your estate in excess of the applicable exemption. Delaware, Hawaii, and Maine have $5.49 million estate tax exemptions for 2017 (the same as the federal exemption). New York’s exemption is $5.25 million. Living (and dying) in these four states means much less risk of unanticipated estate tax exposure. But the wealthy in those states can be exposed to both federal and state estate taxes. Massachusetts, Oregon and D.C. have exemptions of just $1 million.
In 2017, there are six states that have “inheritance” taxes, which are assessed on the value of specifically inherited assets. Estate taxes are assessed on the entire value of an estate, in excess of the applicable exemption. Another difference is that inheritance taxes are paid by the person who inherits the money or property, while estate taxes are paid by the deceased person’s estate before making distributions to heirs. Inheritance tax exemptions are also negligible.
Property passing to a surviving spouse is exempt from state inheritance taxes. Nebraska and Pennsylvania are the only states that tax inheritances passing to children and grandchildren. Maryland and New Jersey have both an estate tax and an inheritance tax. In each case, the inheritance tax exemption is zero and the maximum tax rate is 16% (plus the 16% maximum estate tax rate).
While doing your tax planning, bear in mind that the federal and state estate tax rates aren’t stacked, because state inheritance and estate taxes are deducted from the value of your taxable estate when calculating your federal tax liability. But depending on where you live, you or your heirs may still come up with a pretty hefty tax bill, when you add all of these taxes together.
Reference: MarketWatch (April 20, 2017) “Here are the 20 most expensive places in America to die”