Welcome to episode 72 of the One for the Money podcast. I am so very grateful you have taken the time to listen. Estate and tax planning are critical aspects of better financial planning so your beneficiaries can have a better life. In this episode, I’ll discuss the individual states with the highest estate and inheritance taxes. You’ll learn why you don’t want to die in Oregon or Maryland or a few other states.
In this episode...
- Federal Estate Taxes [1:49]
- Estate Taxes vs. Inheritance Taxes [3:04]
- Considering Your State [3:38]
Benjamin Franklin famously said “In this world, nothing is certain except death and taxes” and in this episode, my focus is on a combination of the two, namely estate and inheritance taxes which are levied at one's passing.
A reminder, your estate is the sum total of all your assets at death. It would include retirement accounts, your home and other real estate, vehicles, jewelry, your classic 23-window van, and other valuable items. For a number of Americans, their estate will be worth millions of dollars. Many wonder if it would be taxed. As a reminder, there are often two categories of taxes you have to consider, namely Federal and State taxes. The good news is that most won’t have to worry about Federal estate taxes because the Tax Cuts and Jobs Act which was passed a few years ago, doubled the amount of an estate that won’t be taxed. Now only those estates that have a value over $13.61 million for an individual or $27.22 million for a couple will be taxed. Those are 2024 numbers and each year it is adjusted for inflation. It should be noted that starting in 2026, if the TCJA does expire then those numbers will be halved. But even in half, those are pretty large values that an estate would have to exceed for that amount to be subject to tax. Consequently, only a tiny percentage have to factor federal estate taxes into their financial planning, and those that do can pay lawyers and accountants to minimize or eliminate most of the Federal estate taxes.
But just because we don’t have to worry about Federal taxes, doesn’t mean that our estate won’t be taxed because our state residence may apply a tax or even two.
The two types of taxes are estate taxes and inheritance taxes. Estate taxes are paid by the estate of the person who died before assets are distributed to the heirs of the estate. Inheritance taxes are paid by heirs on the gifts they receive. There are twelve states and the District of Columbia that impose estate taxes and six states impose inheritance taxes. Maryland is the only state to impose both an estate tax and an inheritance tax (spouses are usually exempt from the inheritance tax).
Now most states have reduced or eliminated their estate and inheritance taxes over the past decade to dissuade well-off retirees from moving to more tax-friendly jurisdictions. But even if you don’t consider yourself particularly wealthy, the value of your home and funds in your retirement savings could exceed the estate tax threshold in some states. With that in mind, if you live in a state that imposes an estate or inheritance tax—and you don’t plan to move—you may want to talk to a certified financial planner or tax professional about steps you can take to reduce the size of your estate.
Just so you are aware here are the states that tax your estate and those that tax the heirs of your estate.
The Estate tax states are Washington, Oregon, Minnesota, Illinois, Vermont, NY, Maine, Mass, Connecticut, RI, Maryland, and DC.
The Inheritance tax states are Nebraska, Iowa, Kentucky, Pennsylvania, NJ, and Maryland.
As noted previously, the state of Maryland is on both lists as they tax both the estate and those who inherit it.
While most individual states that tax Estates or Inheritance will have a high threshold, there are some that do not.
In most states, estate taxes are progressive: the tax rate increases with the total value of the decedent’s assets. Two states, Connecticut and Vermont, have flat estate taxes with a single tax rate. Hawaii and Washington have the highest top rates in the nation at 20 percent. Eight states and the District of Columbia are next with a top rate of 16 percent. All states impose certain exemptions that prevent smaller estates from being subject to these taxes. Oregon has the lowest exemption at $1 million, and Connecticut has the highest exemption at $12.92 million.
Of the six states with inheritance taxes, Kentucky and New Jersey have the highest top rate of 16 percent. Iowa is phasing out its inheritance tax, with full repeal scheduled for 2025, with the tax’s top rate at 6 percent in 2023. All six states exempt spouses, and some fully or partially exempt immediate relatives. Compare state estate tax rates and state inheritance tax rates below.
Here are a few of the states with the highest estate taxes in the U.S. as of 2024:
- Oregon: Oregon’s top estate tax rate is 16%, with a relatively low exemption amount of $1 million. The Beaver State is the worst place in the U.S. to die if you’re concerned about estate taxes. Oregon has resisted the trend to raise its estate tax exemption or even adjust it for inflation. In addition to taxing estates valued at as little as $1 million, Oregon imposes a relatively high minimum tax rate of 10% on even the smallest of qualifying estates.
- Massachusetts: The top rate in Massachusetts is 16%, with an exemption amount of $1 million.
- Washington: With a top estate tax rate of 20%, and threshold is $2.193 million.
- Minnesota: Minnesota imposes a top estate tax rate of 16% with an exemption amount of $3 million.
- Hawaii: Hawaii also has a top estate tax rate of 20%. The threshold is $5.49 million.
- New York: New York has a top estate tax rate of 16%. The exemption amount is $6.58 million.
How impactful inheritance taxes can be really depends on the heir’s relationship with the deceased. For example, Kentucky has no estate tax but it does have an inheritance tax with rates ranging from 4%–16% As with other states with an inheritance tax. The tax isn’t an issue for spouses, parents, children, grandchildren, and siblings. They’re all exempt from Kentucky’s inheritance tax. However, the Kentucky tax can be a nightmare for other heirs. Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren are taxed at rates ranging from 4% to 16%, depending on the value of the property inherited.
Estate and inheritance taxes can be burdensome and should be considered if you live in the state mentioned. While Benjamin Franklin is right that there is nothing certain except death and taxes, with better planning, you can limit or even eliminate their effects.
Tips Tricks and Strategies
Welcome to the tips, tricks and strategies portion of the podcast where I will share a simple yet important estate planning tip when it comes to your beneficiaries.
We often look at our estates being divided in terms of percentage but it may be more helpful to look at it from a dollar perspective. For example an estate divided equally amongst two children would yield 50% to each. But rather than look at it from a percentage perspective, it can be helpful to look at it from a dollar perspective. For example if a person had an estate of $5 million split between their two children it would give them each $2.5M. Looking at it this way can help you decide if you want your children to receive all $2.5m at your passing. Maybe it would be better for certain individuals to receive certain amounts distributed over time, especially if someone in their late teens or early 20s is to receive that kind of money. too many sad stories of young people blowing their inheritance.
References
Estate and Inheritance Taxes by State, 2023
18 States with Scary Death Taxes
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