State Estate Taxes – Will You Have to Pay?
The Tax Cuts and Jobs Act of 2017 made the federal estate tax less relevant from a planning perspective, since it raised each person’s exemption from the tax to over $11 million. So, estate taxes are nothing to worry about, right? Not so fast, since thirteen states levy their version of the tax. That is down from fifteen states just three years ago. Some states just seem to not want to let go of the tax!
What is an estate tax?
Estate taxes are levied at death on the wealth accumulated by a person. Contrast such taxes to gift taxes, which are levied on lifetime transfers to non-spouses. The estate tax rate charged by most states with such tax is 16%. Some states have a low exemption from the tax, such as Massachusetts and Oregon, which give each resident a $1,000,000 exemption. So, if a person owns a home worth $500,000 and has savings and investments of more than $500,000, the state estate tax could snare some of that wealth for state coffers.
Many people forget about state taxes that apply – especially those in high tax jurisdictions that do not tax retirement income like the state of Illinois. Most forms of retirement income in Illinois are not subject to Illinois income tax. So, those living in the Land of Lincoln develop a sense of complacency regarding Illinois taxes that may apply. Illinois taxpayers retiring on large IRA or qualified plan distributions pay no state income tax on such income but could be subject to a hefty state estate tax. Contrast that with Ohio, which taxes retirement income but does not levy estate taxes.
State Gift Taxes
States generally do not tax gratuitous transfers of assets to non-spouses. However, as always, there are exceptions. Connecticut is the only state that expressly levies a gift tax, while Illinois “sneaks” in a tax on lifetime transfers by adding them back in the taxable estate when calculating the Illinois estate tax. The Illinois tax has the effect of taxing transfers made during life just like gift taxes do. Other states factor lifetime gifts in determining estate tax. So, caution is advised when planning gifts as part of an overall estate plan.
State Estate Taxes and Wealth Management. State estate taxes can have a material effect on the amount of wealth transferred to future generations. How can such taxes be avoided? Changing residency and moving assets to a non-taxing jurisdiction is the easiest strategy. States generally do not levy estate taxes on assets located in another state, such as real estate. 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 manager can help lessen the state estate tax bite. So, know the state estate taxes that may apply and plan accordingly!
If you would like a copy of the Best States to Retire in From A Tax Perspective, please contact your wealth manager.
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute and Illinois State Bar Association. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.
No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning.