Unfortunately, the same cannot be said for estate taxes levied by certain states. With a handful of states assessing both estate and inheritance taxes, dying in the wrong state could prove costly for your beneficiaries. After working a lifetime to accumulate assets, it may be wise to preserve as much of that legacy as possible.
So why are more taxpayers paying estate tax on a state level than the federal level? First, the federal applicable exclusion is $5.43 million in 2015. That's right – you do not have to worry about paying federal estate tax unless your estate is greater than $5.43 million or $10.8 million for a married couple that has completed their estate planning.
Many states have much lower thresholds, casting a wider net and impacting more taxpayers when assessing estate or inheritance taxes. Additionally, some states have chosen not to index their exemption amount for inflation, thus gradually increasing the number of taxpayers affected.
Sixteen states and the District of Columbia levy an estate tax with some taking a bigger piece of your estate than others. For this reason, it is critical to understand which states are going to take more out of your beneficiaries pocket when you die. So which states are the most costly?
New Jersey: Of all of the states, New Jersey has the distinction of having the lowest exemption level for estate taxes – just $675,000. Estate tax rates range from 4.8 percent all the way up to 16 percent of the total estate. Not only does New Jersey levy an estate tax, it is also one of only two states to assess an inheritance tax where applicable. Class A beneficiaries will not be impacted by the inheritance tax but may face the estate tax. The garden state also has a three-year look-back on gifts considered to be in contemplation of death. That could trigger additional inheritance taxes. While lawmakers have been working toward reducing the number of taxpayers affected, New Jersey remains one of the worst states for those subject to estate tax.
Oregon: While not as costly as New Jersey, Oregon's exemption of $1 million and estate tax rate starting at 10 to 16 percent make it a costly when leaving a legacy to heirs. Additionally, the exemption is not indexed for inflation and may affect a greater number of taxpayers in the future unless changes are made.
Massachusetts: With an exemption of $1 million, the Massachusetts estate tax impact is still greater when compared to most other states. There is no inheritance tax, but estate tax rates will range from 5.6 all the way up to 16 percent. Additionally, the $1 million exemption is not indexed for inflation.
Maryland: As the only other state beside New Jersey to assess both an estate and inheritance tax, Maryland can be a costly state in which to die. The estate tax exemption increased in 2015 to $1.5 million, however tax rates range from 5.6 percent to 16 percent. While Maryland can still be expensive for beneficiaries, tax rates will gradually improve over time. Each year until 2019, the exemption amount will increase until it mirrors the larger federal exemption – making this expensive state, more cost effective in the future.
Connecticut: With an estate tax exemption amount of $2 million and tax rates of 7.2 to 12 percent, Connecticut appears less costly than many states. However, it is the only state to also assess gift taxes on lifetime gifts greater than $2 million. So be aware of the tax impact of gifting if you reside in this state.
It is important to remember that spouses are exempted from paying estate or inheritance tax. In some states, including New Jersey, this exemption applies to civil unions.
It is really at the death of the surviving spouse when assets are passed to other beneficiaries that estate taxes become an issue. The problem is that too many taxpayers wait until it is too late to establish a plan to address estate or inheritance taxes. Even if you live in one of the more expensive states noted above, developing an estate plan may help to reduce future estate taxes. Consider speaking to your financial, tax and legal advisers to determine the most appropriate approach for you.
Kurt J. Rossi, MBA is a Certified Financial Planner, Practitioner & Wealth Adviser. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com or www.Independentwm.com. LPL Financial Member FINRA/SIPC