State Estate Taxes – Will You Have to Pay?
The Tax Cuts and Jobs Act of 2017 raised each person’s exemption from federal estate tax to more than $13.61 million.1 So, estate taxes are nothing to worry about, right? Not so fast, since several states continue to levy their version of the tax. Here’s what you need to know.
What is an estate tax?
Estate taxes are levied at death on the wealth accumulated by an individual. These taxes can vary significantly by state. Hawaii and Washington State have the highest possible rate, topping out at 20%. Eight other states and the District of Columbia have a top rate of 16%. Massachusetts and Oregon have the lowest exemption threshold of $1 million, while Connecticut has the highest at $13.61 million.2
Tax complacency
It’s easy to forget about state-level estate taxes, especially in jurisdictions that don’t tax retirement income. For example, many forms of retirement income are not subject to Illinois income tax, so it’s possible that someone living in the Land of Lincoln could develop a sense of complacency regarding state tax. But they mustn’t let their guard down, because the fact is Illinois residents could still be subject to state estate tax.3 Contrast this with a state like Ohio, which taxes retirement income but does not levy estate taxes.4 It’s important to understand the rules, and to not be lulled into complacency.
State gift taxes
States generally do not tax gratuitous transfers of assets to non-spouses, but there are exceptions. Connecticut is currently the only state that expressly levies a gift tax, while a state like Illinois indirectly taxes lifetime transfers by adding them back into the taxable estate when calculating the state estate tax5 (albeit with a fairly generous $4 million estate tax exemption).6 The Illinois tax has the effect of taxing transfers made during ones lifetime, just like gift taxes do.7 Other states factor lifetime gifts in when determining estate tax. So, caution is advised when planning gifts as part of an overall estate plan.
State estate taxes and wealth management
Since state estate taxes can have a material effect on the amount of wealth transferred to future generations, how can they be avoided? Changing your residency and moving assets to a non-taxing jurisdiction is one strategy. States generally do not levy estate taxes on assets such as real estate that are located in another state. However, if out-of-state real estate is owned in an entity situated in a “taxing” state, such real estate could fall into an estate tax trap.
Careful planning with your tax advisor and Wealth Advisor may help lessen the state estate tax bite. We recommend that you understand the state estate taxes that may apply in your situation and plan accordingly.8
1 https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
2 https://taxfoundation.org/data/all/state/state-estate-tax-state-inheritance-tax-2021/
3 https://illinoisattorneygeneral.gov/Page-Attachments/InstructionFactSheet2023.pdf
4 https://tax.ohio.gov/professional/estate
5 https://portal.ct.gov/DRS/Individuals/Individual-Tax-Page/Connecticut-Gift-Tax
6 https://smartasset.com/estate-planning/illinois-estate-tax
7 https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=609&ChapterID=8
8 This information is not intended to provide, and should not be relied on for, tax, legal or investment advice. We encourage you consult your own tax, legal and investment experts to discuss your unique circumstances.
ABOUT THE AUTHOR
Neil Teubel, MS, CFP
Neil is a Partner, Wealth Advisor and Investments Leader in our Itasca, IL, office. His passion is helping executives, widows and retirees live full lives while navigating their wealth planning complexities. Neil has his master’s degree in financial planning and has frequently been named to both Forbes and Chicago Crain’s list of Top Wealth Advisors. He joined legacy firm BDF in 2011.
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