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 understands what death taxes are, or if they’re subject to them. It depends to some extent on where you live and the value of how much you own when you die.
Technically, there are two “death taxes”—estate tax and inheritance tax. Estate taxes can be imposed at both the federal level and at the state level, but only states impose an inheritance tax.
As the name implies, the estate tax is based on the value of your estate, and it’s paid from your estate’s coffers. Your beneficiaries and heirs receive what's left. The IRS defines the estate tax as one that applies to “your right to transfer property at your death.”
The federal government collects an estate tax on estates valued at more $11.58 million in 2020 for individual filers. For the 2021 tax year, that exemption will go up to $11.7 million. Only the value of an estate over that threshold is taxed, and the tax rates range from 18% to 40%.
Twelve 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 federal exemption amount.
Six states have an inheritance tax. This tax is levied against the beneficiaries of your inheritance. If you leave your best friend your vintage automobile, she’ll have to pay a percentage of its fair market value to the state if you—not her—live in a state that collects an inheritance tax.
State inheritance taxes require that the beneficiary pay taxes on the inheritance.
States With High Death Taxes
Maryland’s Estate and Inheritance Taxes
Maryland imposes both an estate tax and an inheritance tax. The top estate tax rate is 16% and the exemption is $5 million. The state’s inheritance tax tops out at 10% for distant relatives and unrelated beneficiaries. Combine that with the estate tax and a single bequest can be hit by a combined 26% in death taxes.
Washington's Estate Tax
Washington doesn't have an inheritance tax, but it makes the list of costliest death taxes because its top estate tax rate is 20%. The estate tax exemption here was just $2.2 million as of 2020. Even estates that are just over this threshold will have to pay at least a 10% rate. The rate increases with the value of the estate over this exemption amount.
Hawaii’s Estate Tax
Hawaii’s top estate tax rate is 20% and its $5.5 million exemption is more generous than what’s available in Maryland or Washington. Hawaii doesn’t impose an inheritance tax.
Vermont’s Estate Tax
Vermont also imposes a 16% estate tax rate, but it’s charged to all estates valued at over $2.8 million. A good many more estates will feel the tax pinch here, although Vermont at least spares its residents an inheritance tax.
Minnesota’s Estate Tax
The estate tax rate here also tops out at 16% but its minimum rate of 13% is higher than every other state’s minimum. On top of that, Minnesota’s exemption of $3 million is lower than six of the 13 states and D.C. with estate taxes.
Other States With Death Taxes
The following states implement estate or inheritance taxes at rates and exemption levels that aren't quite as high as the worst offenders:
- Oregon: 10%-16%, $1 million exemption
- Massachusetts: 0.8%-16%, $1 million exemption
- Rhode Island: 0.8%-16%, $1.6 million exemption
- Illinois: 0.8%-16%, $4 million exemption
- New York: 3.06%-16%, $5.9 million exemption
- District of Columbia: 12%-16%, $5.8 million exemption
- Connecticut: 10%-12%, $5.1 million exemption
- Maine: 8%-12%, $5.7 million exemption
- Iowa: 0%-15%
- Kentucky: 0%-16%
- Nebraska: 1%-18%
- New Jersey: 0%-16%
- Pennsylvania: 0%-15%
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 beginning in 2018.
Is It Time to Move?
You can mitigate death taxes with proper estate planning, namely, transferring ownership of some or all of your property into an irrevocable trust. Tax law says that property held in this type of trust isn’t 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.
And keep in mind that tax laws change periodically. These thresholds are current as of 2020, but you should always consult with a tax professional for the most up-to-date.