For most of us, the federal estate tax exemption of $5.49 million for 2017 (and double that if you’re married) leaves little to worry about.
But about 20 states and DC have their own estate or inheritance taxes, and some have both. If you live, or, more to the point, if you die in one state, you may be exempt from the federal estate tax but still exposed to a significant state death tax bill.
If you are thinking about moving to avoid state death taxes, 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 move to a lower-tax state, understand the residency requirements and try to 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 over the 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, six states have “inheritance” taxes, which are assessed on the value of specifically inherited assets. Estate taxes are assessed on the entire value of an estate, over the 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).
The federal and state tax rates are not stacked on top of each other. The state inheritance and estate taxes are subtracted from the value of your taxable estate for calculating the federal estate tax. You can have hefty combined tax rates when adding up federal and state estate taxes, and state inheritance taxes. The federal estate tax rate is a flat 40% on the value of your estate over the exemption ($5.49 million for 2017).