How Your State of Residency Affects Taxes

Estate planning is never an exciting topic, but it is crucial to set up your loved ones for success. If you would like to create the best estate plan for your future, it is essential that you first understand estate taxes. 

When considering estate taxes, where you live will majorly impact how much will be owed when you die. Your loved ones may be responsible for paying both state and federal estate taxes. Here are some helpful estate planning strategies to consider setting you up for success and to explain the estate rules for each state.

Before discussing estate taxes at the state level, there are some important points to consider during estate planning:

1. Remember you can’t take your wealth with you when you pass away. 

2. Consider spousal transfers as wealth held jointly can help the surviving spouse avoid federal estate taxes while living. 

3. Your estate is like a giant IRA account.

4. If you can spend it or sell it then you own it, and it’s a part of your estate.

5. You can reduce your taxable estate by giving away your assets to charity or to others through a trust.

6. A charitable gift annuity is a way for you to still benefit by taking assets out of your name. For example, by giving assets to charity, the nonprofit can put those assets into an annuity which would provide you income during your lifetime. 

It can be easy to assume that estate taxes at the state level are handled the same as the federal level, however, this is not true. Each state can approach the law in a different way if they choose to do so. There are three categories that states can fit into when it comes to this type of tax: estate taxes, inheritance taxes, and no estate or inheritance taxes. 

Estate Taxes

There are a total of 11 states and Washington, D.C. that have an estate tax procedure that is like the federal level. Each state examines the pool of assets and applies the exemption level, and then the remainder is taxed. The following are the exemption levels for each state:

·         New York: $5.9 million exemption, 3.06 – 16 percent tax on remainder.

·         District of Columbia: $5.8 million exemption, 12 – 16 percent tax on remainder.

·         Maine: $5.7 million exemption, 8 – 12 percent tax on remainder.

·         Hawaii: $5.5 million exemption, 10 – 20 percent tax on remainder.

·         Connecticut: $5.1 million exemption, 10 – 12 percent tax on remainder.

·         Illinois: $4.0 million exemption, 0.8 – 16 percent tax on remainder.

·         Minnesota: $3.0 million exemption, 13 – 16 percent tax on remainder.

·         Vermont: $2.8 million exemption, 16 percent tax on remainder.

·         Washington State: $2.2 million exemption, 10 – 20 percent tax on remainder.

·         Rhode Island: $1.6 million exemption, 0.8 – 16 percent tax on remainder.

·         Massachusetts: $1.0 million exemption, 0.8 – 16 percent tax on remainder. 

·         Oregon: $1.0 million exemption, 10 – 16 percent tax on remainder.

Inheritance Taxes

Instead of choosing to tax the estate, the below five states choose to levy tax on the individual’s beneficiary. 

·         Nebraska: 1 – 18 percent tax

·         Kentucky: 0 – 16 percent tax

·         New Jersey: 0 – 16 percent tax

·         Iowa: 0 – 15 percent tax

·         Pennsylvania: 0 – 15 percent tax

There is also one state that chooses to have both the estate tax and inheritance tax:

·         Maryland: $5.0 million estate tax exemption, 0.8 – 16 percent tax on remainder. Inheritance tax is 0 – 10 percent. 

No Estate or Inheritance Taxes

There are a total of 33 states that do not have either tax, which explains why wealthier and older individuals choose to move to one of the following states:

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Georgia, Florida, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.              

As you are beginning to plan your estate consider the taxes of the state that you reside in. Some individuals choose to relocate and establish residency in a state that has more favorable estate tax rules to help their loved ones in the future. 

As always, if you have questions regarding the impact taxes will have on your finances and those you love, be sure to discuss with your financial advisor your plans and find the right solution for your situation.