The federal gift and estate tax exclusion is currently very high; in 2020, the amount equals $11.58 million for an individual and $23.16 million for a married couple. At this level, only very wealthy people need to be concerned about taxes at the federal level. This may change in 2026 when the increased exclusion amount is scheduled to return to the $5 million exclusion in place before 2017. But even if you are not among those in this category, some states have their own estate tax, and a few have an inheritance tax. Only one state—Maryland—has both. State exclusion amounts are typically much lower than the federal estate tax exclusion, so you’ll want to take this tax liability into account as you do your estate planning.
If you own real estate or property in a state with its own estate tax, the tax will be due if the value of your estate exceeds the exemption in that state when you pass away. Your estate pays state estate tax before distributions are made to your heirs. While the estate must pay the estate tax, the heirs could be liable if money and property are distributed to them before the state estate tax is paid.
The following list includes states (and the District of Columbia) that currently have their own estate tax, as well as the exclusion amounts for 2020:
- Connecticut ($5,100,000)
- Hawaii ($5,490,000)
- Illinois ($4,000,000)
- Maine ($5,800,000)
- Maryland ($5,000,000)
- Massachusetts ($1,000,000)
- Minnesota ($3,000,000)
- New York ($5,850,000)
- Oregon ($1,000,000)
- Rhode Island ($1,579,922)
- Vermont ($4,250,000)
- Washington ($2,193,000)
- District of Columbia ($5,762,400)
Note: Under federal tax law, when one spouse dies, their executor can file a Form 706 to elect portability. This allows the surviving spouse to use any unused portion of the deceased spouse’s federal estate and gift tax exclusion after the deceased spouse’s death. However, most states, except for Maryland and Hawaii, do not offer portability for their estate tax exemptions. This means that in most states with their own estate tax, the surviving spouse may not add the deceased spouse’s state estate tax exemption to their own exemption to increase the amount of money and property that can be transferred without liability.
Unlike estate taxes, the heirs are liable when there is an inheritance tax. An inheritance tax may be due if you inherit money or property from a deceased person who lives in or owns property in a state having an inheritance tax. It does not matter where the heir lives. The tax is based upon the value of the property inherited.
Some heirs, such as spouses, children, grandchildren, and charities, are exempt from inheritance taxes. In Nebraska and Pennsylvania, only the surviving spouse and charities are exempt. More distant relatives and non-relatives are usually not exempt, and those who are not related pay the highest rate. Some asset types are exempt from inheritance tax, and most of the states do not exempt a certain dollar amount or exempt only a small amount, meaning that the tax will be imposed on their entire inheritance.
The following states have an inheritance tax:
- New Jersey
Use your Estate Plan to Minimize Tax Liability
- Make lifetime gifts. Most states do not have a gift tax. The annual 2020 federal gift tax exclusion is $15,000 per recipient, which means that you can give away money or property of that value each year to each beneficiary. This does not count against the $11.58 million federal lifetime exemption mentioned above. As a result, lifetime gifts are a great option for individuals who want to lower the value of their estate to avoid their state estate tax or who want to provide a gift to loved ones who may owe an inheritance tax if they wait to make the gift at death.
- Create an irrevocable trust. Any money or property you place in an irrevocable trust is not considered to be part of your estate and thus will not be subject to an estate tax upon your death. The downside to an irrevocable trust is that you no longer have control over its contents. However, certain irrevocable trusts, for example, a qualified personal residence trust (QPRT) and a grantor retained annuity trust (GRAT), allow you to continue to benefit from the property in the trust. If you transfer ownership of your home to a QPRT, you can remove your home from your estate while continuing to live there for a specified number of years, after which the residence is transferred to the trust’s beneficiaries. However, if you die before the period ends, the home will be included in your estate. Similarly, a GRAT allows you to transfer income-producing property, e.g., stock or a business, into a trust for a specific number of years but continue to receive the income from that property. After the trust ends, the property is distributed to the beneficiaries of the trust. However, like the QPRT, if you die before the trust terminates, the property held in the trust will be included in your estate. The QPRT and the GRAT are only two of many potential trust-related strategies that could limit your state estate tax liability.
- Consider moving. (We understand this is easy for us to suggest / possibly very hard for you to do). Moving to another state can increase the amount of wealth you could pass on to your loved ones if your current state means your estate may be taxable. If you were already considering a move to a milder climate, choose a state that does not impose an estate or inheritance tax. Or, if you have two homes, one of which is in a state with no estate tax, consider clearly establishing that home as your permanent place of residence. If you are domiciled in a state with no estate tax, your estate will only have to pay estate taxes on real property or other tangible property you owned in the state with an estate or inheritance tax.
We Can Help
If you live or own real estate in a state with an estate or inheritance tax, we can help you create an estate plan that will minimize your potential tax liability. Please contact us to set up a meeting (via phone or videoconference if you prefer) to discuss any of your estate planning concerns.