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All Contents © 2016The Kiplinger Washington Editors
Federal estate taxes are no longer a problem for all but the extremely wealthy. In 2016, as much as $5.45 million in assets will be exempt from federal estate taxes—double that for a married couple.
However, state estate taxes, which kick in for estates valued at only $1 million or less in several states, could take a big bite out of your legacy. Your home and retirement accounts will be counted when your estate is valued for tax purposes, and proceeds from your life insurance could be counted, too, depending on how the policy is owned and who gets the money.
Sixteen states and the District of Columbia impose an estate tax, and seven states impose an inheritance tax, which can force certain heirs to give up a portion of their inheritance. The good news is that a growing number of states are increasing their estate-tax exemptions in an effort to dissuade well-off retirees from moving to more tax-friendly jurisdictions. In 2015, four states increased their estate-tax exemption, and more relief is scheduled over the next five years.
Tennessee’s inheritance tax (which is actually an estate tax because it’s applied to the value of estates) will be eliminated in 2016. The state didn’t quite make our list of the 10 States With the Scariest Death Taxes this year, and it will fall out of contention entirely next year. Maine drops off our list (it was number eight in 2014) because its estate-tax exemption will jump from $2 million to $5.43 million—the same as the federal threshold—on January 1, 2016.
Here's a look at the states that are the least friendly places to die.
By Sandra Block, Senior Associate Editor
| Originally Published October 2015
Exemption level before state estate tax kicks in: $675,000
State estate tax rates: 4.8% - 16% (on estates valued at about $10 million or more)
Exempt from estate tax: Spouses, civil union partners
Inheritance tax: Yes
New Jersey lawmakers have proposed making the Garden State’s estate tax less onerous, but nothing has happened yet. New Jersey remains one of only two states (along with Maryland) to impose both estate and inheritance taxes. And New Jersey's exemption level at which estate taxes kick in is, by far, the lowest in the country.
Parents, grandparents, descendants, children and their descendants, spouses, civil union partners, domestic partners and charities are exempt from the state's inheritance tax. There is also a $25,000 per-person exemption for siblings, sons-in-law and daughters-in-law. But other heirs are taxed at graduated rates ranging from 11% to 16% on inheritances valued at $500 or more.
New Jersey also "looks back" to gifts made to non-exempt individuals within three years prior to death. Such gifts are also subject to the inheritance tax unless beneficiaries can prove that the gifts weren't made "in contemplation of death."
Exemption level before state estate tax kicks in: $1 million
Estate tax rates: 10% - 16% (on estates valued at $9.5 million or more)
Exempt from estate tax: Surviving spouses and registered domestic partners
Inheritance tax: No
The Beaver State has resisted the trend to increase its estate-tax exemption (or even adjust it for inflation). The state’s tax still kicks in for estates valued at as little as $1 million. In addition, it also imposes a relatively high 10% tax rate on those smaller estates.
Estate tax rates: 5.6% - 16% (on estates valued at more than $10 million)
Exempt from estate tax: Spouses only
With its exemption stuck at $1 million, Massachusetts lags that of several other states, including neighboring Rhode Island.
Exemption level before state estate tax kicks in: $1.4 million
Estate tax rates: 5.6% - 16% (on estates valued at about $10 million or more)
Not only does Minnesota have a low exemption level for estates, but when calculating the value of your estate, Minnesota looks back to include taxable gifts made within three years prior to death.
Exemption level before state estate tax kicks in: $1.5 million in 2015 and 2016.
The Ocean State adjusts its estate-tax threshold annually for inflation. Unfortunately, thanks to low inflation, the exemption will remain unchanged in 2016.
Exemption level before state estate tax kicks in: $1.5 million in 2015; $2 million in 2016
The Free State is gradually becoming a more tax-friendly place to die. Its estate-tax exemption will increase every year until 2019, when it will match the federal exemption.
Exemption level before state estate tax kicks in: $3,125,000 through March 31, 2016; $4,187,500 through March 31, 2017.
State estate tax rates: 7.2% - 12% (on estates valued at about $10 million or more)
The Constitution State is the only state with a state gift tax on assets you give away while alive. You'll have to file Connecticut gift tax returns every year to identify any such gifts, but taxes are due (at rates ranging from 7.2% to 12%) only when the aggregate value of gifts made to any individual since 2005 exceeds $2 million.
Exemption level before state estate tax kicks in: $2,054,000
Estate tax rates: 15% - 19% (on estates valued at more than $9 million)
Exempt from estate tax: Spouses
The Evergreen State's estate tax rates are unusually high. But Washington offers an additional $2.5 million deduction for family-owned businesses valued at less than $6 million. Its estate tax exemption is indexed to inflation.
Estate tax rates: 5.6% - 16% (on estates valued at more than about $10 million)
The Empire State is gradually increasing its estate-tax exemption, and, as of January 1, 2019, it will match the federal threshold. But beware, because New York’s estate tax contains a very scary feature: if If your estate exceeds the threshold by
105% — $3,281,250 for the first quarter of 2016, for example — the entire estate will be taxed.
Exemption level before state estate tax kicks in: $2,750,000
Estate tax rates: 9%-16%
With Maine off our list, Vermont moves to the tenth scariest spot. Vermont is also number one on our list of least tax-friendly states for retirees.
1. New Jersey
5. Rhode Island
9. New York
Kiplinger updates these rankings annually. Above is our 2014 list of the states with the scariest death taxes. The list is based on Kiplinger's analysis of state tax laws; information is gathered from state tax department Web sites, CCH and the Tax Foundation.
1. New Jersey
2. Rhode Island
6. New York
Kiplinger updates these rankings annually. Above is our 2013 list of the states with the scariest death taxes. The list is based on Kiplinger's analysis of state tax laws; information is gathered from state tax department Web sites, CCH and the Tax Foundation.
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