With the federal estate tax disappearing for most people, state death taxes have emerged as a surprise new worry.
This year, the federal exemption rose to $3.5 million per individual, or as much as $7 million per married couple. At the current level, only 5,500 estates a year are federally taxable.
That is down from the 17,500 estates that would have faced death taxes under the previous $2 million limit, the Urban-Brookings Tax Policy Center estimates.
The problem is that most states with estate or inheritance taxes haven't raised exemptions to match the federal limits. That means thousands of taxpayers who now escape the federal levy could still get hit with a state death tax.
As a result, tax advisers are tweaking bypass trusts that allow married couples to maximize exemptions from state taxes. They are advising taxpayers where to retire in order to pare or eliminate estate taxes. And they are counseling out-of-state taxpayers so that they don't get dinged for property they own in a state with a tough death tax. ...
Seventeen states and the District of Columbia currently impose estate taxes, according to CCH Wolters Kluwer. Eight states have inheritance taxes, which are levied on heirs, not estates. Maryland and New Jersey have both.
Compared to the uniform federal tax, state taxes are a crazy quilt. In many states with inheritance taxes, rates are tied to how closely the heir is related to the late donor. Iowa and Kentucky exempt both spouses and children who inherit property, while Nebraska treats only transfers to spouses as tax-free.
Rates and exemptions vary widely. Washington state's top tax rate is 19%, but it applies only to estates over $2 million. Pennsylvania, by contrast, taxes children and grandchildren of an heir at an almost-flat rate of 4.5%. More-distant heirs pay up to 15%.