March 15, 2013
Authored by: Stephanie Moll and Cynthia D. Kennedy
Written with assistance from our Spring Extern Debra Faulkner
When the American Taxpayer Relief Act was enacted in early January, for many Americans, it all but eliminated the concern over the estate and gift taxes by making the $5,000,000 exemption (indexed for inflation) permanent. While the new law provides clarity and a sense of permanency, beware of becoming too complacent: 21 states and the District of Columbia still have estate or inheritance taxes. Two states – Maryland and New Jersey – have both.
The state estate and inheritance tax legislation, much like the federal estate tax legislation, has been notoriously volatile. In 2001, all 50 states had some form of death-time transfer tax, either an estate or an inheritance tax. In 2013, only 21 states have an estate or inheritance tax and in two of those states – Delaware and Tennessee – the taxes are set to expire. The exemption rate, like the questionable persistence of the estate tax itself, is uncertain and subject to constant fluctuation. Illinois, for example, has changed its estate tax exemption three times in as many years. While many states, like Illinois, Maine, and Tennessee, have scheduled exemption increases, Connecticut lowered its estate tax exemption in 2011 from $3,500,000 to $2 million. The current state estate tax exemptions range from $675,000 in New Jersey to $5,250,000 (the federal estate tax exemption) in Delaware, Hawaii, and North Carolina. The corresponding estate tax rates range from less than 1% up to 16%.
Unlike an estate tax, which is levied upon the estate of an individual after death, an inheritance tax is a tax levied upon heirs that inherit property. Inheritance tax rates vary widely based upon the heir’s relationship to the decedent. For example, in Indiana, a spouse or charity is not subject to any tax on inherited property but a friend must pay a 10-15% inheritance tax on the value of property received that exceeds $100. In Maryland, lineal descendants take property free of tax, while property passing to other individuals is subject to a 10% tax. The inheritance tax rates range from 0% for certain classes of heirs (such as spouses) to 20% for non-relatives in some states. Like the estate tax, the inheritance tax changes frequently. Of the six states with the tax, two states – Tennessee and Indiana – have already enacted legislation to phase-out the tax. According to current law, Tennessee will no longer have an inheritance tax in 2016, and Indiana’s tax is set to be repealed entirely in 2022.
While the ever-changing nature of the estate and inheritance taxes undoubtedly concerns residents of the 21 tax-levying states, residents of other states may also be on the hook for these taxes. Property located within an estate tax-levying state is subject to the tax, even if the owner of the property lived and died elsewhere. Similarly, inheritance tax may be owed by heirs who receive property from a decedent who lived in a state with inheritance tax. The perpetual unpredictability of these taxes underscores the importance of regular estate planning reviews.
For more information on state inheritance and estate taxes, see the links below to the applicable statutes.
*Nebraska has inheritance taxes, but unlike other states, the tax is collected at the county level.