The old adage “location, location, location” apparently applies even in death. Nearly half of U.S. states impose an estate or inheritance tax regardless of whether the resident's estate also owes federal estate taxes. Two states, New Jersey and Maryland, levy both estate and inheritance taxes.
Florida, Nevada, and Alaska are among the states generally thought to be attractive locales in which to reside, not only when you are living — because there is no income tax — but when you die, as they have neither estate nor inheritance taxes.
“More and more, all the time, it's very important for wealthy families to think about state estate taxes,” said Irving Schloss, an estate tax lawyer in Madison, Conn. “If you have between $2 million and $10 million, you may escape federal estate taxes, but you'll probably face them from the state if you live in one of half of the states with them.”
In fact, many estates owe taxes to multiple states because the deceased person owned a vacation home or other tangible property such as a boat outside of the state they lived in when they died.
Intangible property, such as stocks and money in bank accounts, is taxed in the state the individual legally resided in at death, regardless of where the investments are physically located, Mr. Schloss said.
Imposing just an estate tax, with exemption amounts ranging from $338,333 to $5 million, are Washington, Oregon, Minnesota, Ohio, North Carolina, Hawaii, New York, Delaware, Connecticut, Massachusetts, Vermont, Maine, Rhode Island, Illinois and the District of Columbia. Rates vary from 7% in Ohio (although the tax ends in 2013) to 19% in D.C.
Six states collect just an inheritance tax, which is paid by the heirs and not the estate, and generally increases for beneficiaries the more removed they are from being close family members. Rates range from 9.5% to 20% in Pennsylvania, Tennessee, Kentucky, Indiana, Iowa and Nebraska.
“New Jersey typically rises to among the highest levels of the least favorable places to pass away,” said John McManus, a tax attorney and founder of McManus & Associates. “And New York is not great.”
New Jersey begins taxing estates at $675,000 and has a maximum rate of 16%, in addition to a maximum 16% inheritance tax on beneficiaries who are not spouses or parents, or children or other lineal descendants. New York has a $1 million exemption for its estate tax, which also tops out at 16%.
Of course, states are always changing their tax rules, including those triggered by death.
In May, Connecticut lowered its estate tax exemption from $3.5 million to $2 million as part of a larger package of tax increases. Connecticut kept its 12% top tax rate but made the threshold change retroactive to Jan. 1. Now the estate of a wealthy man who died in April is suing the state for making the tax retroactive and costing it an extra $100,000 in taxes.
“Relative to the states around us, Connecticut has a larger exemption amount and a top rate that is lower,” Mr. Schloss said. Two years ago, Connecticut cut its maximum estate tax rate to 12%, from 16%, he said.
Illinois also recently adjusted its estate tax, which was zero for 2010. State lawmakers reinstated it for 2011 and beyond and set a $2 million exemption and a top rate of 16.7%, said estate attorney James Lestikow.
“For very rich people I've counseled over the years, it can make a lot of sense for them to move to a state without an estate tax,” Mr. Lestikow said. Florida is especially attractive, not just because it doesn't have an estate tax but because it also has several other kinds of asset protection strategies available to residents, he said.
Unlike Connecticut and Illinois, Ohio and Maine are moving in the opposite direction.
“Ohio is becoming a better state to die in,” said Barbara Janovitz, an estate tax lawyer in Cleveland. The legislature in the Buckeye State has voted to eliminate state estate taxes as of Jan. 1, 2013. Until then, the first $338,333 of the estate is exempt in Ohio, estates worth up to $500,000 pay 6% and estates worth more than $500,000 pay 7%.
“The theory behind passage of the law was that people thought Ohio was losing residents to Florida and other states without an estate tax,” Ms. Janovitz said.
While the estate tax was unpopular, she worries the state will have to raise other taxes to make up for the lost revenue — and those taxes could have a bigger impact on a vast majority of residents every year, compared with the relatively small portion of people who have to pay Ohio estate taxes in a given year.
Maine also is decreasing its estate tax by boosting its exemption to $2 million, from $1 million, as of Jan. 1, 2013. It also lowered its top rate to 12%, from the current 16% level.
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