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Surprise! State Estate Taxes You Didn't Expect




When it comes to estate planning, understanding the intricacies of inheritance tax is important in the United States. Certain federal and state governments impose taxes on certain inheritances. We shall discuss the basics of inheritance tax, including federal tax amounts and limits, potential changes to those amounts, state inheritance laws, and information to help you navigate this complex landscape.


Generally the rule is most of us will never have to worry about federal inheritance tax, as it is set around 12.92 million before the estate is taxed federally. And that is at a step-up basis (only taxed on the amount above 12.92 million). However, there are 17 states and Washington, D.C., that also impose a state inheritance tax. This is where issues arise.


Federal Inheritance Tax

Currently, the federal government does not impose a blanket inheritance tax. It determines inheritance tax based upon the overall value of the estate before it is distributed to beneficiaries. The estate tax exemption is currently set at 11.7 million. Meaning that tax is only assessed on estates that are valued above the 11.7 million dollar mark. This is called a step-up valuation. The amount above the 11.7 is what is taxed, so not the amount up to the 12.92 million (side note: I'm working reallllly hard on having this problem!)


It is important to note, this amount fluctuates with administrations and is subject to change. So if you are lucky enough or have worked hard enough to be within the range, it is a good idea to keep an eye on what the amount is and work closely with your estate planning and financial planning professional.


State Inheritance Tax

Here is a great Wall Street Journal Article on State Income Tax- Written by Ashlea Ebeling that explains the state nuances and difficulties in paying estate taxes.

You can read the full article here: The Wall Street Journal: https://apple.news/AXvOo8jRHQzmbZjmEzNJYqg


"While the federal estate tax hits only the wealthiest Americans, the thresholds for state estate and inheritance taxes are generally much lower. These taxes can cost heirs/beneficiaries tens of thousands of dollars they aren’t expecting to pay, along with the grief of figuring out how to pay the bill when the bulk of an estate’s value is tied up in a house or business. The problem is especially acute now because of the recent meteoric rise in real-estate values."


For example, Karl Yee was about to pay a nearly $112,000 Massachusetts tax bill for his late mother’s estate when he got a reprieve from the governor. A retroactive change to the state’s estate-tax law had dropped the estate’s bill to $12,000.

“Hallelujah!” he said, after hearing the news. 


As families like the Yees often learn too late, the state tax rules are complicated and subject to change, estate lawyers said.


Seventeen states and the District of Columbia have an estate tax, an inheritance tax or both. Generally, your estate will be subject to these taxes if you consider one of these places your permanent home or you have property there.


Estate taxes get levied at rates of up to 20% on estates over a certain threshold, known as the exemption amount. Estate-tax exemption amounts vary from $1 million to $12.92 million.

Inheritance taxes are slightly different. They aren’t levied on the estate, but the heirs. The much lower exemption amounts and tax rates depend on the heir’s relationship to the deceased.


Unmarried partners typically pay the top rate. In New Jersey, for example, if you leave your estate to a niece, nephew or unmarried partner, they are taxed at 15% on assets up to $700,000 and 16% on assets above $700,000.


There is no estate or inheritance tax when assets are left to a spouse who is a U.S. citizen.


The threshold for an individual to owe federal estate taxes is $12.92 million, and it rises to $13.61 million for 2024. In 2021, 2,584 estates paid more than $18.4 billion in federal estate taxes. Only one state, Connecticut, matches the federal threshold.


Unlike the federal tax, a big share of state estate- and inheritance-tax revenue doesn’t come just from the wealthiest families, but from the large number of smaller estates subject to the levy. 


The state estate tax wasn’t on the Yee family’s radar. 

His mother, Suy Kue Yee, who worked as a union seamstress and his father, Bake Yee, a cook at a Chinese restaurant, immigrated from China when he was 8 months old. When his mother died in January, at age 93, she was living in the two-family home the couple bought for $43,000 in 1970. 


The house, now appraised at $2.08 million, plus her bank account balances, put her estate in Massachusetts estate-tax territory. Karl and a sister are working out a deal to buy out their three siblings’ shares so they can stay in the house.

“Are people caught off guard? Yes,” says June Wiyrick Flores, an estate planning and administration lawyer in Portland, Ore.


When states change the threshold

Yee’s tax bill dropped when Massachusetts became the latest state to soften its estate-tax bite, doubling the exemption from $1 million to $2 million. 

That leaves Oregon as the only state with a $1 million threshold. Its legislators passed a law retroactive to deaths as of July 1 that exempts up to $15 million of farm, forestry and fisheries property from its estate tax. That provision would have knocked about $100,000 off the estate-tax bill for a client who left his 60-acre fruit orchard to his son last year, Flores said.

States are also changing inheritance-tax rules. 


Other State's Inheritance Tax

Iowa is phasing out its inheritance tax after Dec. 31, 2024. Nebraska reduced its top inheritance-tax rate to 15% from 18%, effective Jan. 1, and eliminated taxes for heirs under 22. Efforts are under way to get a question on the 2024 ballot asking voters whether they want to ditch the tax altogether.

Richard Clements, an estate lawyer in Elmwood, Neb., is handling the estate of a mail carrier who died last year and left his farmhouse to his college-age niece and nephew. They had to take out an additional loan on the house to pay the $40,000 inheritance-tax bill. They are now selling, reluctantly, Clements said. 

“Sentimentally, it would be nice to keep the house that their great-grandparents owned,” he said.


How to plan for state estate taxes 

If you live in a state with an estate tax or expect to inherit from someone who does, here’s what to know:

Watch out for the estate-tax cliff. In New York, when the estate’s value is slightly higher than the exemption amount, the effective tax rate on the excess value is extraordinary, said Toni Ann Kruse, a private-client lawyer with McDermott Will & Emery in New York City. For an estate that is valued at $6.9 million, 5% above the $6.58 million New York exemption amount, the estate tax would be $626,000, a 9% effective tax rate but a 190% marginal rate on the excess. 


For estates near the so-called cliff, taxpayers can give away assets to reduce the value of their estates before death, or include a clause in their will that directs any amount in excess of the exemption amount to charity, Kruse said.


Illinois has a similar cliff at $4 million. The new Massachusetts law eliminated its cliff, which is why the savings for the Yee estate was so dramatic.


Check for inflation adjustments. Some states, like Rhode Island which has a $1,733,264 exemption, increase the threshold each year in line with inflation. That helps keep more estates below the new thresholds, even as the value of the assets grows. In other states, like Illinois at $4 million, the amounts are static, snagging more estates as asset values rise.


Nonresidents can owe estate taxes. If you live in a state with no estate or inheritance tax but own property in a state that has one, you can still be on the hook for taxes. 

Flores just completed an Oregon estate-tax return for a Nevada transplant who kept investments properties and his former home in Bend, Ore. The investment properties were shielded from Oregon taxes because they were held in a limited liability company. The son, who was the executor, was surprised that he had to pay Oregon estate taxes of about $65,000 on the $640,000 home, which wasn’t put in the LLC, Flores said.


Move out of state. The ultimate move to avoid state death duties is to move. Jeff Bezos recently said he was relocating from Seattle to Miami, a step that could shield his heirs from Washington state’s estate tax."


Luckily, Nevada does not have an inheritance tax and many of the states are phasing out their state inheritance tax, or making significant changes to help ensure normal every day people who have worked hard to accumulate some wealth can pass that wealth to their heirs and loved ones without a major tax penalty.





Let us know if you have questions or if your state has an inheritance tax you may be concerned with!



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