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What Are State Inheritance and Estate Taxes?

State inheritance taxes, also known as death taxes, are taxes that are levied against an individual who is named as a beneficiary of an individual’s estate. These taxes are levied by the state and are paid by the recipient of assets from the deceased’s, also called the decedent’s, estate.

State estate taxes are taxes levied by the state against the estate of the deceased’s assets once their debts are repaid. There is also a federal estate tax that is levied against estates worth more than, approximately $12 million.

Not all states have an inheritance tax or estate taxes. Those that do have variable rates of taxation and thresholds for taxation. If an estate is not above the state’s threshold, then no tax is levied against the state. Additionally, there are certain deductions and exemptions that can reduce an individual’s estate and inheritance tax burdens.

Spouses of the decedent may be able to take advantage of a state’s version of the marital deduction which could reduce their tax burden to 0. Similarly, close relatives may pay less in state inheritance taxes through familial deductions. 

Key Takeaways

  • State inheritance taxes are taxes levied by the state against beneficiaries who receive assets from an estate.
  • State estate taxes are taxes levied by the state against the estate of an individual. State estate taxes are distinct from federal estate taxes and have different rates and thresholds.
  • Both state estate taxes and state inheritance taxes can be mitigated or even eliminated through the strategic use of bypasses, deductions, and exemptions.
  • If you want to establish an estate that bypasses as may state estate or inheritance taxes as possible, an experienced Trusts & Estates attorney may be able to improve the outcome of your case by utilizing experience and expert knowledge.

State Inheritance Taxes, Trusts, and Estates

State inheritance taxes and estate taxes vary across the country. 11 states have estate taxes, 5 states have state inheritance taxes, and one state - Maryland - has both.

The states who have an estate tax have a variety of thresholds and tax rates. These taxes are levied during the probate process after the decedent’s will has been processed as part of the settling of liabilities. The states with state estate taxation and their rates are:

  • Connecticut has an estate tax threshold of $7.1 million and charges between 10.8% - 12% of the estate’s fair market value.
  • The District of Columbia has an estate tax threshold of $4 million and charges between 11.2% - 16% of the estate’s fair market value.
  • Hawaii has an estate tax threshold of $5.5 million and charges between 10% - 20% of the estate’s fair market value.
  • Illinois has an estate tax threshold of $4 million and charges between 0.8% - 16% of the estate’s fair market value.
  • Maine has an estate tax threshold of $5.8 million and charges between 8% - 12% of the estate’s fair market value.
  • Maryland has an estate tax threshold of $5 million and charges between 0.8% - 16% of the estate’s fair market value. 
  • Massachusetts has an estate tax threshold of $1 million and charges between 0.8% - 16% of the estate’s fair market value.
  • Minnesota has an estate tax threshold of $3 million and charges between 13% - 16% of the estate’s fair market value.
  • New York has an estate tax threshold of $5.9 million and charges between 3.06% - 16% of the estate’s fair market value.
  • Oregon has an estate tax threshold of $1 million and charges between 10% - 16% of the estate’s fair market value. 
  • Rhode Island has an estate tax threshold of $1.6 million and charges between 0.8% - 16% of the estate’s fair market value. 
  • Vermont has an estate tax threshold of $5 million and charges 16% of the estate’s fair market value.
  • Washingtonhas an estate tax threshold of $2.2 million and charges between 10% - 20% of the estate’s fair market value.

These tax rates can vary and by utilizing deductions and exemptions, crafty individuals can still avoid these lower estate tax thresholds. 

States with a state inheritance tax will levy them against the beneficiaries of the estate when they receive the assets after the probate process. Those states and their taxation rates are:

  • Iowa levies a maximum inheritance tax of 15%
  • Kentucky levies a maximum inheritance tax of 16%
  • Maryland levies a maximum inheritance tax of 10%
  • Nebraska levies a maximum inheritance tax of 18%
  • New Jersey levies a maximum inheritance tax of 16%
  • Pennsylvania levies a maximum inheritance tax of 15%

Through familial deductions these inheritance taxes can be reduced or even eliminated. 

Bottom Line

When you are planning your estate, it’s important to not only consider the federal taxes that may apply, but also the state level taxes that may keep your assets from your beneficiaries. If you want to create an estate plan that skirts or avoids state inheritance taxes and state estate taxes, you will need a trusts & estates attorney.

An experienced trusts & estates attorney can use their knowledge of the local, state, and federal tax codes to ensure that your estate is left as whole as possible for distribution. A trusts & estates attorney may be able to avoid taxation through the use of trusts, deductions, or exemptions, to get you the best possible tax breaks for your needs and circumstances.

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