We’ve seen a lot of changes in the state estate tax landscape in the past few years as some states have made major changes to their taxes, while others have repealed theirs entirely. These state taxes should be seriously considered when making estate planning decisions.
For starters, only 12 states and the District of Columbia currently impose a state estate tax. These being: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Each of these jurisdictions (except for MD and VT) imposes a graduated tax rate on estates with values over a specified exclusion amount – ranging from $1 million in MA to $5.74 million in OR. MD and VT simply use a flat 16% rate on each dollar above their respective exclusion amounts.
These distinctions between state rates can make a sizable impact on a taxable estate, whether it be worth $1 billion or $10 million, in fact, the most variation between state estate taxes occurs between $1-50 million in value. Once over that $50 million mark, the difference in tax liability between states begins to lessen. And don’t think you are in the clear just because you live in a state with no estate tax. Real and tangible property are generally subject to estate tax in the state where the property is located – which could trigger an estate tax in a nonresident state.
One way to reduce future state estate taxes, with the exception of CT, is to make lifetime gifts. Though the timing and exact rules vary between states, in most states, lifetime gifts can be excluded from the state’s estate tax base or calculations of their exclusion amount. For example, if Joe has a net worth of $6 million living in Washington State, which has an annual exclusion of $2.19 million, on death he would have WA estate taxes of $519,000. Assuming Joe has $11.4 million of Federal unused exemption, before death he can make a $3.81 million gift, therefore reducing his WA estate to $2.19 million, and excluding it from WA estate tax. Depending on gifted assets, however, there can be a major downside to this strategy, as the recipient of the gift will receive the donor’s basis in the asset instead of the stepped-up fair market value as of date of death.
There are a couple of various idiosyncratic provisions certain states have, that you should be aware of when planning your estate.
- Hawaii and Maryland are the only states that allow surviving spouses to “port” the decedent’s unused state exclusion amount.
- Connecticut is the only state that imposes a gift tax, BUT a taxpayer’s combined gift and estate tax liability is capped at $15 million.
- Maryland exempts up to $5 million of Qualified Agriculture Property from its estate tax.
- Oregon exempts the full value of certain farms, forests, and fisheries from its estate tax.
- In Illinois, Massachusetts, and New York, estates that exceed the exclusion amount, following a brief period where the exclusion phases out, are taxed on their full values, not just to the extent they exceed the exclusion amount. This results in the corresponding top marginal rates of 28.6%, 41%, and 240%.
Henry+Horne is here to help you navigate your way through the confusing and ever-changing estate tax landscape, both at the Federal and State level.