Estate and inheritance taxes vary by state

By Elliot Raphaelson
Posted on March 22, 2024

Federal estate taxes apply equally to all, no matter where in the United States they live. But state estate taxes and inheritance taxes vary significantly among states.

Estate taxes are paid by the estate based on its size at the time of the estate owner’s death. Both federal and state estate taxes have exemptions. Taxes, if any, are based on the size of the estate above the exemption amounts. There is no state estate tax or inheritance tax if assets are inherited by a surviving spouse who is a U.S. citizen.

Inheritance taxes are paid by individuals rather than the estate. Inheritance taxes, too, have exemptions, and taxes are owed only on amounts that exceed the exemption.

Inheritance taxes are based on the relationship between the deceased individual and the individual who inherited funds. Each state establishes its own regulations in this regard. Unmarried parties generally pay the highest inheritance taxes.

Federal estate taxes range from 18% to 40% for estates above $12.92 million. Seventeen states and the District of Columbia have either estate or inheritance taxes. Maryland is the only state that has both estate and inheritance taxes.

Eleven states have only state estate taxes. These are: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.

State estate taxes can be as high as 20% when the size of the estate exceeds the exemption amount. The exemption amount ranges from $1 million up to almost $13 million. As an example, in Maine, there would be no taxes on the first $6.41 million; the estate tax would be between 8% and 12% for amounts above that.

The following states have only inheritance taxes: Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania. As an example, in Kentucky the tax is up to 16%. The exemption amounts for inheritance are much lower than the exemptions for state estate taxes. States with high inheritance taxes are Kentucky, Pennsylvania, Nebraska, Maryland and Iowa.

If your state is not included in the preceding lists, then you would not incur state estate or inheritance taxes. However, if you own property in a state that assesses state estate taxes, then it is likely you would incur income taxes in that state.

If you live in a state that assesses state estate taxes, or you expect an inheritance in a state that assesses inheritance taxes, you should go to the state’s website for the Department of Revenue for this information.

Another good source is the following article from July 2023: fool.com/research/
estate-inheritance-taxes. (Beware that states may have made changes for 2024, and you should depend on your state’s website for updated information.)

Things to look out for

Here are some recommendations made by estate attorneys regarding planning for state estate and inheritance taxes.

— Examine the “estate tax cliff.” The cliff refers to the marginal tax rate after the threshold is reached.

For example, in New York, the threshold amount was $6.58 million in 2023. However, as the financial services firm J.P. Morgan explains on its website, “the exemption begins to phase out at values over the threshold, and if an estate is more than 5% over the threshold (which comes to $6,909,000 in 2023), the estate completely loses the exemption and the full value of the estate’s assets will be subject to New York estate tax.” If the estate exceeds $6.94 million, the marginal tax rate on the amount above the threshold is 190%!

In order to avoid the high marginal tax rate, an individual may wish to consider giving away assets above the threshold, or including a provision in the will that directs any amount above the threshold be given to charity. This recommendation was made by Toni Ann Kruse, a private-client attorney with McDermott Will and Emery in New York City.

— Check for inflation adjustments: Some states have inflation adjustments to their threshold, while others do not. For example, in Illinois, the $4 million threshold is not adjusted for inflation.

— Nonresidents who own property in another state: If you own property in another state, your estate could be subject to state estate taxes. Depending on state law, you may avoid these taxes if you hold the assets in a limited liability company. Discuss this with your attorney.

— Revisit your estate plan: If you are not familiar with the regulations regarding state estate taxes, you should discuss this issue with your attorney. To maximize the exemption for both spouses, consider the possible advantage of credit shelter trusts with your attorney.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.