Where Not To Die In 2013: State Estate and Inheritance Taxes

Even with the new federal estate tax law, families in 21 states and the District of Columbia where separate state levies are still very concerned state estate and inheritance taxes.

While the fear factor of the federal estate tax is gone for the majority of those whom are wealthy, state estate and inheritance taxes are still a source of worry.

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State estate and inheritance taxes have been in constant flux over the last decade, and even more confusing, in some states, the level at which the tax kicks in has been changing (rising and falling).

Thanks to the fiscal cliff tax teal (the American Taxpayer Relief Act), the federal estate tax exemption of a generous $5 million per person, indexed for inflation, is now permanent. In 2013, up to $5.25 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any excess over the exemption amount.

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Contrastingly, states with estate taxes typically exempt $1 million or less per estate from their tax and impose a top rate of 16%. New York, for example, sets its exemption at $1 million. So the estate of a person dying in New York with $5.25 million would owe no federal tax, but would owe New York $420,800.

Six states levy only an inheritance tax, with the rate based on the relationship of the heir to the deceased and the taxes kicking in, in some instances, on the first dollar of bequest. Only Maryland and New Jersey impose both. Maryland imposes an estate tax of up to 16% above a $1 billion exemption, and a 10% inheritance tax on every dollar left to a niece. nephew, friend or partner, but no inheritance tax on money left to children, grandchildren, parents or siblings. Any estate tax owed is reduced by the inheritance tax paid. As in the federal system, bequests to a spouse are tax-free.

A trend is emerging to eliminate state estate taxes, or at least lessening the tax bite by increasing the amount exempt from the tax. Ohio no longer has an estate tax. Delaware falls of the list effectively July 1, 2013 when its current temporary estate tax expires. Indiana’s inheritance tax is repealed effective Jan. 1, 2022. Tennessee’s inheritance tax is repealed effective Jan. 1, 2016.

In Indiana, there is a gradual phase-out of the tax, starting with a 10% credit effective Jan. 1, 2013, and in Tennessee the amount exempt from the state inheritance tax is rising each year, from $1.25 million this year, to $2 million in 2014 and $5 million in 2015.

Maine’s exemption doubles to $2 million this year, while Rhode Island’s exemption goes up to $910,725 this year, up from $859,350 in 2012 as it’s indexed for inflation.

Connecticut is the only state going in the other direction. In 2011, it lowered the amount it exempts from its tax from $3.5 million to $2 million per estate. And Illinois is the most recent state to implement an estate tax — it resurrected an estate tax in 2011 with a $2 million exemption — now $4 million.

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North Carolina is the next state to watch our for. Recently elected Rep. Governor Pat McCrory made abolishing the state estate tax one of his campaign promises:

“North Carolina is now the only state in the Southeast with the death tax. This tax unfairly punishes those who would inherit their loved one’s possessions or business, forcing some families to sell off a small business or family farm just to pay the tax. As governor, [I] will fight to eliminate the death tax for North Carolinians.”

A technical provision of the federal estate tax law includes a deduction for state tax paid — instead of the pre-2001 state death tax credit, which permit states to share in the estate tax revenue the feds collected. For states hoping for a return to revenue sharing, research analyst at tax publisher CCH, James Walschlager, believes it’s possible that they will consider adding stand-alone taxes.

Above is an interactive map that shows the state by state estate and inheritance taxes in the United States.

Read more: http://www.forbes.com/sites/ashleaebeling/2013/01/28/where-not-to-die-in-2013/

Mr. Witzke practices in the areas of estate and gift tax planning, financial planning, retirement planning, LGBT civil rights, charitable giving, elder law, and small business planning. He focuses on helping clients grow, protect, and transfer wealth efficiently. Mr. Witzke is a past president and board member of the Financial Planning Association of Michigan, a member of the board of directors for Leadership Oakland, and a member of the planned giving advisory committees of Wayne State University and the Community House in Birmingham. Follow Mr. Witzke on Twitter @gr8estatelawyer.