States With the Highest Death Taxes: Inheritance and Estate Taxes
Do you live in one of these states where dying is particularly costly?
Two words in the English language have the power to make almost anyone cringe: “death” and “taxes.” Combine them and they sound particularly ominous. Even worse, not everyone really understands what death taxes are, or if they’re subject to them. It depends to some extent on where you live and just how much you own of value when you die.
Technically, there are two “death taxes,” so even if one doesn’t get you, the other might. Estate taxes can be imposed at both the federal level and at the state level.
The Estate Tax
The first death tax is the estate tax. The federal government collects one, but only from very large estates—those with values in excess of $11.4 million as of 2019. This is up from $11.18 million in 2018. Only the value of an estate over that threshold is taxed.
But 12 states and the District of Columbia also have an estate tax, some with significantly smaller exemptions. The IRS at least allows your estate to take a deduction for anything it must pay to your state. This reduces the value of your estate for federal tax purposes, potentially bringing it under the exemption amount.
As the name implies, the estate tax is paid from your estate’s coffers. Your beneficiaries and heirs receive what's left over. The IRS defines the estate tax as one that applies to “your right to transfer property at your death.” Ouch.
The Inheritance Tax
Then there’s the other death tax: the inheritance tax. The federal government doesn’t have one of these, but six states do. This tax is levied against those who inherit from you. If you leave your best friend your vintage automobile, he’ll have to pay a percentage of its fair market value to the state if you—not he—lives in one of those that collects an inheritance tax.
You can leave instructions in your estate plan that your estate should pay for any inheritance taxes that come due if you want to spare him this burden when ownership of your property transfers to him. Governments don't particularly care who pays a given tax as long as someone does.
Death Taxes in Maryland
Maryland is probably the costliest state in which to die in 2019. The state imposes both an estate tax and an inheritance tax.
The estate tax exemption here was set at $4 million as of the end of 2018. The tax rate is a flat but pretty significant 16 percent for all estate values over that amount. In other words, if your estate is worth $4,000,001, it will pay 16 cents. If it’s worth $4,100,000, it will pay $16,000 in estate tax.
But Maryland is making some changes, too. The estate tax exemption is expected to increase in 2019 to match the federal exemption, and the federal exemption is extremely generous. So Maryland estates can count on not paying estate taxes on values of up to at least $11.4 million for deaths that occur in 2015. And the federal exemption will most likely increase a little each year because it's indexed for inflation.
As for Maryland's inheritance tax, this tops out at 10 percent for distant relatives and unrelated beneficiaries. But combine that with the current estate tax and a single bequest can be hit by a combined 26 percent in death taxes.
New Jersey Falls to Second Place
Here's a bit of good news if you die owning any real or personal property in New Jersey. The estate tax here was eliminated as of January 1, 2018.
But some of your beneficiaries might have to pay an additional 16 percent of the value of any inheritance they receive from you. The state does take it easy on immediate kin: Spouses, parents, grandparents, children, grandchildren, and stepchildren are all exempt from this tax. But all others—including your siblings, the spouses of your children, or your civil union partner—will pay an inheritance tax at a rate that escalates with the value of the property they’ve inherited from you.
Washington's Estate Tax Is Hefty
Washington doesn't have an inheritance tax, but it makes the list of states having the costliest death taxes because it has the highest estate tax rate of any state in the nation—20 percent. The tax admittedly applies only to estates valued at over $9 million, but that's still 4 percent more than any other state in the country.
You’d have to be pretty wealthy before you’d have to worry about your estate paying that top rate, but the estate tax exemption here is just $2.193 million as of 2019. Even estates that just inch over this threshold will have pay a 10 percent rate. The rate increases with the value of the estate over this exemption amount.
Kentucky's Inheritance Tax
Kentucky doesn’t collect an estate tax, but it still makes because it imposes a pretty significant inheritance tax at a top rate of 16 percent.
The state does offer an exemption for its inheritance tax—only gifts valued at more than this exemption amount are taxed—but it’s a paltry $500. So if you give your neighbor that $1,000 garden sculpture he’s always coveted, he’ll have to give the state government $80, or 16 percent of the $500 balance over the exemption amount.
Kentucky does spare spouses, siblings, parents, and children from this tax, however.
Nebraska's Exemptions Might Save You
Nebraska doesn't have an estate tax, either, and it actually has a higher inheritance tax rate than Kentucky, but its inheritance tax exemptions are significantly larger. Overall, this can result in a lower tax bill.
The inheritance tax exemption is $10,000 for non-relatives, $15,000 for distant relatives like aunts, uncles, nieces, nephews, and in-laws, and $40,000 for parents, siblings, children, and grandchildren. Only gifts valued at more than these thresholds are taxed.
Spouses are totally exempt—they can inherit without worrying that the tax man will cometh. That said, all others will pay from 1 percent up to a walloping 18 percent in inheritance tax. Close relatives in the $40,000 exemption category only pay 1 percent, but non-relatives might have to sell their inheritances to pay that 18 percent rate on anything over $10,000.
This is not a complete list of all states that collect death taxes. It's just those where the tax tab has the potential to get pretty high in one way or another.
Pennsylvania and Iowa also collect an inheritance tax, but the highest rates top out at 15 percent as of 2018.
Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, and Vermont also collect an estate tax, but their rates are somewhat less grievous than those in Washington, and they don't double-dip the way Maryland does, imposing an inheritance tax as well.
Indiana used to have an inheritance tax, but it got rid of it in 2013. Tennessee repealed its estate tax in 2016, and Delaware did the same in 2018. New York is set to increase its estate tax exemption to match the federal exemption of $11.4 million in 2019, and the District of Columbia has announced that it intends to do so eventually as well, although a target date has not been set yet.
Is It Time to Move?
You can mitigate the death tax bite with proper estate planning, such as by transferring ownership of some or all of your property into an irrevocable trust. Tax law says that property held in such a trust is not technically yours any longer so it doesn’t contribute to the value of your estate. Consult with an estate planning attorney to learn all the pros and cons of this solution. Otherwise, you can always pack your bags and call for a moving van.