If you plan to leave significant assets to heirs, you need to watch out for estate and inheritance taxes. The federal estate tax applies to combined gross assets and prior taxable gifts that exceed $11.7 million per individual and $23.4 million for couples in 2021. However, some states have lower estate tax thresholds.
Twelve states and the District of Columbia have estate taxes and six states have inheritance taxes. Maryland is the only state that has an estate tax and an inheritance tax. Here’s how to find out if estate and inheritance taxes will impact your heirs and steps you can take to minimize taxes for beneficiaries.
[See: 10 Tax Breaks for People Over 50.]State Estate Tax Thresholds
Estate taxes are deducted from a deceased person’s estate. There are 12 states and the District of Columbia that levy estate taxes, and states tax smaller estates than the federal government. Massachusetts and Oregon have the lowest estate tax thresholds and tax estates over $1 million. Maine and New York offer bigger estate tax exemptions and tax estates that exceed $5.8 million and $5.9 million, respectively. Connecticut has the highest estate tax exemption of $7.1 million, among states that have an estate tax.
Those with estates just slightly bigger than the cutoff might pay an estate tax as low as 0.8% of the amount above the cutoff in some states. However, the top estate tax rate is often 16% of the amount above the exemption and can be as high as 20% in some states. Hawaii and Washington have the highest maximum estate tax rates.
The estate tax might not apply to you if you plan to leave your entire estate to your spouse. “There is generally an unlimited marital deduction,” says Alexander Bove, a trust and estate attorney at Bove & Langa and author of “The Complete Book of Wills, Estates & Trusts.” “Most states do not tax the receipt of money by a spouse in an estate.”
States With an Estate Tax
— Connecticut: 10.8% to 12% on estates above $7.1 million.
— Hawaii: 10% to 20% on estates above $5.5 million.
— Illinois: 0.8% to 16% on estates above $4 million.
— Maine: 8% to 12% on estates above $5.8 million.
— Maryland: 0.8% to 16% on estates above $5 million.
— Massachusetts: 0.8% to 16% on estates above $1 million.
— Minnesota: 13% to 16% on estates above $3 million.
— New York: 3.06% to 16% on estates above $5.9 million.
— Oregon: 10% to 16% on estates above $1 million.
— Rhode Island: 0.8% to 16% on estates above $1.6 million.
— Vermont: 16% on estates above $5 million.
— Washington: 10% to 20% on estates above $2.2 million.
— Washington, D.C.: 11.2% to 16% on estates above $4 million.
Source: The Tax Foundation, 2021.
[See: 10 Ways to Reduce Taxes on Your Retirement Savings.]State Inheritance Tax Rates
Inheritance taxes are paid by the inheritor of an estate. While there is no federal inheritance tax, six states levy taxes on inheritances. However, whether your inheritance will be taxed can vary depending on your relationship to the person who passed away and the type of asset you inherited. For example, surviving spouses are typically exempt from inheritance tax, and in some states descendants of the deceased aren’t subject to the inheritance tax. “Inheritance tax is only for gifts to individuals outside your direct linear blood line,” says Shana Siegel, a certified elder law attorney at Norris McLaughlin in Bridgewater, New Jersey. “So if you wanted to make a bequest to a niece or friend, I might recommend a lifetime gift or leaving a portion of your life insurance to them as a beneficiary because it is exempt from inheritance tax in New Jersey.”
States With an Inheritance Tax
— Iowa: up to 15%.
— Kentucky: up to 16%.
— Maryland: up to 10%.
— Nebraska: 1% to 18%.
— New Jersey: up to 16%.
— Pennsylvania: up to 15%.
Source: The Tax Foundation, 2021.
[See: The Most Tax-Friendly States to Retire]How to Minimize Estate and Inheritance Taxes
Estate taxes can vary considerably based on where you live. “Consider moving your tax home to a state with no inheritance or estate tax, or even a state with no income tax either,” says Greg Will, a certified financial planner and managing partner at Bestgate Wealth Advisors in Frederick, Maryland.
Some people aim to minimize estate taxes by giving away funds before they pass away. “There are a wide variety of tactics available, which typically involve making transfers to trusts or heirs during your lifetime,” Will says. “Since estate taxes can be substantial, the savings from estate tax planning can be massive.”
