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The Worst U.S. States to Die In

You don’t have to be rich to be exposed to estate and inheritance taxes here


(This article appeared previously on MarketWatch.com

With the current relatively generous federal estate tax exemption of $5.25 million for 2013 and $5.34 million for 2014, you surely don’t have any estate tax worries. Right?

Not necessarily. It turns out that 19 states and the District of Columbia impose their own estate and/or inheritance taxes, and most of them have exemptions well below the federal amount.  If you live in one of these places, your estate might be exempt from the federal estate tax but still be exposed to a significant state death tax hit.

Yikes! Here’s what you need to know.

 
Many States Have Estate Taxes
 
For 2013, 14 states plus the District of Columbia had their own estate taxes (as opposed to inheritance taxes, which will be explained later). Like the federal estate tax, these state estate taxes are based on the entire value of your estate in excess of the applicable exemption. Exemptions vary from a low of $675,000 to a high of $5.25 million.
 
Two states have exemptions of less than $1 million (New Jersey at $675,000 and Rhode Island at $910,625).
 
Five states have $1 million exemptions (Maryland, Massachusetts, Minnesota, New York, and Oregon) and so does D.C.
 
Three states have $2 million exemptions (Connecticut, Maine and Washington).
 
Delaware and Hawaii have $5.25 million exemptions (same as the federal exemption), so there is less risk of unanticipated estate tax exposure if you live in those states. That said, Delaware and Hawaii estates worth over $5.25 million (for 2013) could be hit with both the federal estate tax and the state version.
 
The lowest maximum state estate tax rate is 12 percent (Connecticut and Maine). The highest is 19 percent (Washington). The other states and D.C. all charge a 16 percent maximum rate.
Jurisdiction         2013 Exemption*      2013 Maximum Tax Rate* 
Connecticut           $2,000,000 12 percent
Delaware                 5,250,000 16 percent
District of Columbia     1,000,000 16 percent
Hawaii                  5,250,000 16 percent
Illinois                 4,000,000 16 percent
Maine                    2,000,000 12 percent
Maryland                 1,000,000 16 percent
Massachusetts          1,000,000 16 percent
Minnesota               1,000,000 16 percent
New Jersey               675,000 16 percent
New York                1,000,000 16 percent
Oregon                  1,000,000 16 percent
Rhode Island               910,625 16 percent
Vermont                2,750,000 16 percent
Washington               2,000,000 19 percent
* We don’t yet know for sure about 2014, because state laws could be changed for this year.
 
Sources: Forbes.com and ING.
 
7 States Have Inheritance Taxes
 
For 2013, seven states impose inheritance taxes, which are assessed on the value of specific inherited assets in excess of the applicable exemption. (In contrast, estate taxes are assessed on the entire value of an estate in excess of the applicable exemption.) The inheritance tax exemptions are zero or negligible — except in Tennessee. Exemption amounts and maximum tax rates are shown below.
Jurisdiction       2013 Exemption*      2013 Maximum Tax Rate* 
Iowa                 $15 15 percent
Kentucky                   500 16 percent
Maryland                  150 10 percent
Nebraska                10,000 18 percent
New Jersey                zero                   16 percent
Pennsylvania              zero                   15 percent
Tennessee**         1,250,000 9.50 percent
 

* We don’t yet know for sure about 2014, because state laws could be changed for this year.

** Gradually phasing out the tax: 2014 exemption is $2 million; 2015 exemption will be $5 million; tax will be fully phased out after 2015.
 
Sources: Forbes.com and ING.
 
Maryland and New Jersey Have Both
 
Maryland and New Jersey charge both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is $150 and the maximum tax rate is 10 percent (in addition to the 16 percent maximum estate tax rate). In New Jersey, the inheritance tax exemption is zero and the maximum tax rate is 16 percent (in addition to the 16 percent maximum estate tax rate).
 
The rest of the states have no death taxes.
 
The 31 states that aren't listed in the preceding tables have no estate or inheritance taxes.
 
How Death Taxes Add Up
 
Thankfully, the federal and state tax rates aren't just stacked on top of each other — because state inheritance and estate taxes are subtracted from the value of the taxable estate in calculating the federal estate tax. Despite the subtractions, you can wind up with some pretty horrific effective combined tax rates when you account for federal and state estate taxes and state inheritance taxes. For 2013 and beyond, the federal estate tax rate is a flat 40 percent on the estate tax value in excess of the applicable exemption: $5.25 million for 2013 and $5.34 million for 2014.
 
For instance, the maximum combined rate for 2013 in Connecticut and Maine (states with 12 percent estate tax rates) would be 47.2 percent while the maximum rate in a state with a 16 percent rate would be 49.6 percent. When tax rates approach 50 percent, you are well within your rights to whine.
 
The Bottom Line
 
When it comes to death taxes, some states are better places to die than others. That may not be a reason to move, but it’s something to think about if you’re dedicated to leaving more to your heirs and less to tax collectors. If you don’t want to move, I suggest huddling with an experienced estate planning pro to see if there are some ways to reduce your exposure to death taxes. 

Bill Bischoff covers tax and retirement issues for MarketWatch.com. 

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