Many U.S. states don't collect a death tax at the state level as of the tax year 2021, but several do, and several changes to state estate taxes and inheritance taxes have taken effect in this millennium. How these might affect you and your estate depends on where you or a loved one lives, and the differences can be drastic.
Understanding Some Common Terms
Understanding what individual states do and don't do begins with grasping the various terms involved and what they mean to you.
The term "death tax" is something of an umbrella covering both estate and inheritance taxes. Estate taxes are levied against an estate based on its value, but only values above a certain threshold called an "exemption" are taxed on that portion.
A $1 million estate in a state with a $500,000 exemption would be taxed on $500,000.
The estate tax is paid by the estate, whereas the inheritance tax is levied on, and paid by, the beneficiary who receives a specific bequest. It's based on the value of that transfer, not the whole estate. Most states that have an inheritance tax will exempt very close relatives, and sometimes the deceased will indicate in their will that they want the estate to cover this.
"Portability" is another common term in estate planning. It means that any exemptions not used by one spouse's estate can be transferred to the surviving spouse for later use at their time of death.
States Without Death Taxes
As of 2021, 33 states collected neither a state estate tax nor an inheritance tax:
- New Hampshire
- New Mexico
- North Carolina
- North Dakota
- South Carolina
- South Dakota
- West Virginia
A federal estate tax is in effect as of 2021, but the exemption is significant: $11.7 million, increasing to $12.06 million for deaths that occur in 2022. The federal government does not impose an inheritance tax.
States That Have Repealed Their Estate Taxes
Seven states have repealed their estate taxes since 2010:
- Delaware repealed its tax as of January 1, 2018.
- State estate taxes were abolished by legislative action on January 1, 2010, in Kansas and Oklahoma.
- The Ohio estate tax was repealed as of January 1, 2013, under Ohio budget laws.
- New Jersey phased out its estate tax in 2018.
- North Carolina also repealed its estate tax on January 1, 2010, but it reinstated it a year later. It later turned around and repealed the tax again, retroactively to January 1, 2013.
- Tennessee repealed its estate tax in 2016.
Other Death Tax Changes by State
A number of other significant, back-and-forth changes have occurred in the millennium.
Hawaii enacted an estate tax effective May 1, 2010. Then, in May 2012, the state adjusted its laws to provide that the Hawaii estate tax exemption would be tied to the federal estate tax exemption for decedents dying after January 25, 2012.
Hawaii is one of only two states that offer portability of their estate tax exemptions. Maryland is the other.
Estate taxes were repealed in Illinois on January 1, 2010, although they were later reinstated effective January 1, 2011. The estate tax exemption increased two more times, settling on $4 million effective January 1, 2013.
Indiana passed laws in 2012 that would have phased out its inheritance tax by 2022. The inheritance tax exemption was increased from $100,000 to $250,000 for certain family members effective January 1, 2012. Nonetheless, Indiana's inheritance tax was repealed retroactively to January 1, 2013, in May 2013.
Maine's estate tax exemption was recently increased to $5.87 million for 2021.
H.B. 739, the Maryland Estate Tax/Unified Credit, was signed into law on May 15, 2014. The law repealed and re-enacted Maryland's estate tax so the exemption would increase, starting in 2015 until it equaled the federal estate tax exemption in 2019.
Maryland has recognized the portability of its estate tax exemption between married couples since 2019.
In July 2013, Minnesota adjusted its estate tax laws as they applied to non-residents who own real estate there. This legislation included Minnesota property held in pass-through entities such as S corporations, partnerships, LLCs, or a nonresident's estate.
Then, under legislation signed in March 2014, the state estate tax exemption was retroactively increased to $1.2 million for all 2014 deaths. The estate tax rate was adjusted so that the first dollars are taxed at a 9% rate, which ultimately maxes out at 16%. The estate tax exemption was then increased in $200,000 increments to reach $3 million in 2020.
Minnesota law also allows married couples to use ABC Trust planning to defer the payment of all estate taxes until after the second spouse's death.
Finally, the law taxing a nonresident decedent's interest in a pass-through entity was modified to exclude certain publicly traded entities. However, it still applies to those taxed as partnerships or S corporations that own a closely held business, farm, or cabin.
New York made significant changes to its estate tax laws in April 2014 by increasing the state exemption from $1 million to $2.0625 million for deaths occurring on or after April 1, 2014, and before April 15, 2015. The exemption continued to increase annually until it matched the federal estate tax exemption in 2019.
Oregon's estate tax rates changed on January 1, 2012, so that estates valued between $1 million and $2 million would pay slightly less in estate taxes, and estates valued over $2 million would pay more. Then a November 2012 ballot measure completely repealed the state's estate tax by a majority vote.
Rhode Island acted to increase its exemption to $1.5 million in June 2014 for deaths occurring on or after January 1, 2015. The exemption will continue to be adjusted annually for inflation in future years. Its estate tax exemption increased to $850,000 on January 1, 2020.
Vermont's estate tax exemption increased to $5 million effective January 1, 2011.
Washington made several changes to its state estate tax laws in June 2013. The $2 million estate tax exemption was indexed for inflation annually beginning in 2014. An estate tax deduction of up to $2.5 million was available for certain family-owned business interests if the values didn't exceed $6 million. The estate tax rates on the top four estate tax brackets were increased.