If you plan to leave important possessions to heirs, you have to watch out for inheritance and inheritance taxes. The federal estate tax applies to combined gross assets and past taxable gifts that exceed $11.7 million per person in 2021 and $23.4 million for couples. However, some states have lower thresholds for inheritance tax.
Twelve states and the District of Columbia have estate taxes, and six states have estate taxes. Maryland is the only state with estate and estate taxes. Here’s how to find out if estate and estate taxes affect your heirs and steps you can take to minimize taxes for: beneficiaries.
State Tax Thresholds
Inheritance tax is withheld from a deceased person’s estate estate. There are 12 states and the District of Columbia that levy estate taxes, and states tax smaller estates than the federal government. Massachusetts and Oregon have the lowest real estate and estate tax thresholds at over $1 million. Maine and New York offer larger property tax and tax exemptions in excess of $5.8 million and $5.9 million, respectively. Connecticut has the highest property tax exemption of $7.1 million, among states that have estate taxes.
Those with estates just slightly larger than the border may pay an estate tax of as little as 0.8% of the amount above the border in some states. However, the top property tax rate is often 16% of the amount above the exemption and can be as high as 20% in some states. Hawaii and Washington have the highest maximum estate taxes.
The estate tax may not apply to you if you intend to leave your entire estate to: your husband. “There is generally an unlimited marriage deduction,” says Alexander Bove, a trust and estate attorney at Bove & Langa and author of “The Complete Book of Wills, Estates & Trusts.” “Most states do not tax a spouse’s receipt of money in an estate.”
States with a wealth tax
— Connecticut: 10.8% to 12% on estates above $7.1 million.
— Hawaii: 10% to 20% on estates over $5.5 million.
— Illinois: 0.8% to 16% on estates over $4 million.
— Maine: 8% to 12% on estates over $5.8 million.
— Maryland: 0.8% to 16% on estates over $5 million.
— Massachusetts: 0.8% to 16% on estates over $1 million.
— Minnesota: 13% to 16% on estates over $3 million.
— New York: 3.06% to 16% on estates over $5.9 million.
— Oregon: 10% to 16% on estates over $1 million.
— Rhode Island: 0.8% to 16% on estates over $1.6 million.
— Vermont: 16% on estates over $5 million.
— Washington: 10% to 20% on estates over $2.2 million.
— Washington, DC: 11.2% to 16% on estates over $4 million.
Source: The Tax Foundation, 2021.
Inheritance tax rates
Inheritance taxes are paid by the heir of an estate. While there are no federal estate taxes, six states levy taxes on inheritances. However, whether your inheritance is taxed can vary depending on your relationship with the deceased and the type of wealth you inherited. For example, surviving spouses are typically exempt from estate taxes, and in some states, descendants of the deceased are not subject to the estate tax. “Inheritance tax is only for gifts to individuals outside of your direct linear bloodline,” said Shana Siegel, a certified senior attorney at Norris McLaughlin in Bridgewater, New Jersey. “So if you’d like to make a bequest to a niece or friend, I might suggest you give a lifetime gift or leave a portion of your life insurance policy to them as a beneficiary because it’s exempt from estate taxes in New Jersey.”
States with an inheritance tax
— Iowa: up to 15%.
— Kentucky: up to 16%.
— Maryland: up to 10%.
— Nebraska: 1% to 18%.
— New Jersey: up to 16%.
— Pennsylvania: up to 15%.
Source: The Tax Foundation, 2021.
How Do You Minimize Inheritance Taxes and Inheritance Taxes?
Property taxes can vary significantly depending on where you live. “Consider moving your taxes to a state with no estate or estate taxes, or even a state with no income taxes,” says Greg Will, a certified financial planner and managing partner at Bestgate Wealth Advisors in Frederick, Maryland.
Some people strive to minimize estate taxes by: give money away before they die. “A wide variety of tactics are available, usually involving transfers to trusts or heirs during your lifetime,” Will says. “Because estate taxes can be significant, the savings from estate planning can be huge.”