Estate planning is essential to protect the value of your estate and create the lowest possible amount of taxation when assets are transferred to your heirs.
Estate planning is especially important for larger estates. The IRS estate tax exemption of $12.06 million excludes many estates from federal taxation, and that exclusion amount is doubled for married couples. However, some states impose estate taxes while others impose inheritance taxes – and one state imposes both.
Let’s dive into both estate and inheritance taxes and look at which states impose them.
An estate tax is sometimes called a “death tax” because it’s imposed on your assets after you die. The assets in your estate are taxed at their current fair market value rather than your original cost basis. If a surviving spouse inherits your estate, he or she won’t have to pay the federal estate tax because there’s an unlimited deduction for married couples. The federal estate tax only applies to estates valued greater than $12.06 million, and that number rises to $12.92 million in 2023.
Twelve states and the District of Columbia impose an estate tax.1 The table below shows tax rates and exemption amounts:
|
State |
2022 Exclusion Amount |
Tax Rate |
|
Connecticut |
$9.1 million |
10.8%-12% |
|
District of Columbia |
$4 million |
11.2%-16% |
|
Hawaii |
$5.5 million |
10%-20% |
|
Illinois |
$4 million |
.8%-16% |
|
Maine |
$5.8 million |
8%-12% |
|
Maryland |
$5 million |
.8%-16% |
|
Massachusetts |
$1 million |
.8%-16% |
|
Minnesota |
$3 million |
13%-16% |
|
New York |
$6.1 million |
3.06%-16% |
|
Oregon |
$1 million |
10%-16% |
|
Rhode Island |
$1.7 million |
.8%-16% |
|
Vermont |
$5 million |
16% |
|
Washington |
$2.2 million |
10%-20% |
Source: Tax Foundation
Estate taxes are levied against the grantor’s estate. Inheritance taxes are levied on heirs after they inherit an estate’s assets. Tax rates vary depending on the grantee’s relationship to the deceased grantor and by the size of the estate. Another key difference is that inheritance taxes only apply to the specific assets that are inherited rather than the decedent’s entire estate.
The six states in the table below impose an inheritance tax:
|
State |
Tax Rate |
|
Iowa |
0%-10% |
|
Kentucky |
0%-16% |
|
Maryland |
0%-10% |
|
Nebraska |
0%-18% |
|
New Jersey |
0%-16% |
|
Pennsylvania |
0%-15% |
Source: Tax Foundation
A perceptive eye can note that only Maryland imposes an estate tax along with an inheritance tax.
According to the Comptroller of Maryland, the estate tax is imposed, “on the privilege of transferring property” and is a full accounting of all assets held in a decedent’s estate. The tax is due nine months after the decedent’s passing.
The inheritance tax, meanwhile, is imposed, “on the privilege of receiving property.” It is collected by the state’s Register of Wills in the county in which the decedent lived or owned property and is due upon distribution of assets to heirs.2
Estates valued less than the 2022 federal exclusion of $12.06 million won’t have to pay any federal estate taxes; however, 12 states and the District of Columbia impose estate taxes. Tax rates and exclusion amounts vary.
Only six states impose inheritance taxes, which are paid by the heirs of inherited assets or property. Maryland is the lone state that imposes both an inheritance and estate tax.
Estate taxes can take a chunk out of the value of your estate, while inheritance taxes can leave your heirs facing a tax liability. Consulting with an estate planner or other certified financial professional can help position you to leave more of your assets to your heirs without undue tax liabilities.
1Does Your State Have an Estate or Inheritance Tax? Tax Foundation, https://taxfoundation.org/state-estate-tax-inheritance-tax-2022/