There is a lot of focus recently on the federal estate and gift tax and the potential for changes due, and rightly so. The tax rate is 40% of amounts gifted and left at your death above the exemption amount, which is likely to go down. But, what a lot of people don’t consider is that some states have their own estate taxes, and in a few cases, inheritance tax. Texas has neither, but I thought a blog on state estate and inheritance taxes would be a good follow-up to my recent blog on issues to consider when moving to a new state. See that here: https://www.galliganmanning.com/should-you-update-your-estate-plan-if-you-move-to-a-new-state/
Although it has fallen out of favor recently, many states still have either an estate tax, inheritance tax or some combination. According to The Tax Foundation’s recent article entitled “Does Your State Have an Estate or Inheritance Tax?” 17 states and the District of Columbia all apply some or both of these taxes. Hawaii and the State of Washington have the highest estate tax rates in the nation at 20%, and there are 8 states and DC that are next that apply a top rate of 16%. Massachusetts and Oregon have the lowest exemption levels at $1 million, and Connecticut has the highest exemption level at $7.1 million. For the New York readers, the estate tax exemption is at nearly $6 million and applies rates from about 3% up to 16% depending on how far you exceed the exemption.
6 states have inheritance taxes. Inheritance taxes, unlike estate taxes, apply a tax rate based relationship of the decedent to the beneficiary, meaning it applies even if the estate is relatively small. Nebraska has the highest top rate at 18%, and Maryland has the lowest top rate at 10%. All 6 of these states exempt spouses, and some fully or partially exempt immediate relatives. For you Pennsylvania readers, this could be anywhere from 0% to spouse and 15% to individuals who aren’t close family members.
Estate taxes are paid by the decedent’s estate, prior to asset distribution to the heirs. The tax is imposed on the overall value of the estate less the exemption applicable to that state. Inheritance taxes may be due from either the estate or the recipient of a bequest and are based on the amount distributed to each beneficiary.
As I mentioned earlier, most states have been steering away from estate or inheritance taxes or have upped their exemption levels because estate taxes without the federal exemption hurt a state’s competitiveness. Delaware repealed its estate tax at the start of 2018, and New Jersey finished its phase out of its estate tax at the same time, though it still applies its inheritance tax.
Connecticut still is phasing in an increase to its estate exemption. They plan to mirror the federal exemption by 2023. However, as the exemption increases, the minimum tax rate also increases. In 2020, rates started at 10%, while the lowest rate in 2021 is 10.8%. Connecticut’s estate tax will have a flat rate of 12% by 2023.
In Vermont, they’re still phasing in an estate exemption increase. They are upping the exemption to $5 million on January 1, compared to $4.5 million in 2020.
DC has gone in the opposite direction. The District has dropped its estate tax exemption from $5.8 million to $4 million in 2021, but at the same time decreased its bottom rate from 12% to 11.2%.
So, it is of course a good idea to consider reviewing your estate plan when relocating, but especially if you move to states that have estate or inheritance tax. Talk to an experienced estate planning attorney about how estate and inheritance taxes affect you in your new state.
Reference: The Tax Foundation (Feb. 24, 2021) “Does Your State Have an Estate or Inheritance Tax?”