State Estate Taxes – Will You Have to Pay?
How much state tax will you pay on your estate? The answer can vary considerably by state. Here’s a look at what to consider so you can plan accordingly.
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
Neil is a Partner and Head of Wealth Planning at Corient. He oversees the entire team of planning experts across the country. He designs and manages the firm’s wealth planning vision and strategy with the goal of ensuring clients receive comprehensive expertise and have a unique experience. Neil believes in the critical importance of having an integrated wealth experience and finds it rewarding to help clients navigate the complexities of wealth to achieve their goals. Prior to Corient, Neil’s experience includes positions with legacy firm Balasa Diverno Foltz (BDF). He holds bachelor’s and master’s degrees in financial planning and is a CERTIFIED FINANCIAL PLANNER® professional. Neil and his wife, Jenny, have three young kids and when he’s not in the office, you can find him golfing, hiking, renovating houses, or running after Sienna, Cole and Ford.
