When a person dies, an estate tax or an inheritance tax, and sometimes both, may be levied on assets that are transferred to beneficiaries. Below is an explanation of each of these taxes and the states that have the highest estate and inheritance taxes.
Estate Tax vs. Inheritance Tax
Federal estate taxes on property are levied only on estates that are over a certain value. These are taxes that are due on the net value of the deceased person's estate. In 2016, this level is $5.45 million, and the rate is 40%. On top of this, many states have their own estate taxes. Estate taxes are paid by the deceased person's estate, before any assets transfer to beneficiaries. Inheritance taxes, on the other hand, are taxes levied on assets inherited by a beneficiary. These taxes are paid by the beneficiary and not the deceased person's estate.
A heir's relationship with the decedent may grant certain exemptions to inheritance tax. A person generally does not have to pay inheritance tax on property received from a spouse. Other dependents, such as children, may receive a reduction in inheritance taxes due as well. Unlike the estate tax, the beneficiary of the property or assets is the person responsible for paying the tax, not the estate itself. It should also be noted that there is no federal inheritance tax as of 2016. In 2016, 12 states and the District of Columbia levy an estate tax, four states charge an inheritance tax and two states levy both taxes.
The following is a list of states with the highest combination of estate and inheritance taxes.
New Jersey charges a top estate tax rate of 16%. It also charges a top inheritance tax rate of 16%. As one of the only two states that levies both types of taxes, New Jersey is the most expensive state in the United States to die and pass on assets to beneficiaries, if they live in the same state. Up to 32% of the gifted assets may be taxed.
Maryland is the other state in the United States that charges both estate and inheritance taxes. Maryland has a flat estate tax rate of 16% and a top inheritance tax rate of 10%. Potentially, gifted assets will be taxed 26% in total at the state level. In Maryland's case, as with New Jersey, it could save a substantial amount of money in estate and inheritance taxes to move residence before the inheritance occurs.
The third-most expensive state for estate taxes and inheritance taxes is Washington. While this state only charges an estate tax and no inheritance tax, it does have the single highest overall estate tax. The top rate in the state is 20%, a full 4% higher than any other state.
The Fourth Tier
In terms of estate tax, there are nine states, along with the District of Columbia that are tied for fourth place. Delaware, Hawaii, Illinois, Massachusetts, Minnesota, New York, Oregon, Rhode Island and Vermont all have top estate tax rates of 16%. None of these states, nor the District of Columbia, charge an inheritance tax. There is one state that has a top inheritance tax rate of 16%: Kentucky. While Kentucky charges an inheritance tax, it does not levy an estate tax.
The Fifth Tier
Three states tie for fifth place on the most expensive estate and inheritance tax list: Iowa, Nebraska and Pennsylvania. These states have a top inheritance tax rate of 15%. While they charge an inheritance tax, none of these states has an estate tax.
States With the Highest Estate Taxes
Delaware, Hawaii, Illinois, Massachusetts, Minnesota, New York, Oregon, Rhode Island and Vermont along with the District of Columbia have a top estate tax rate of 16%.
State Estate Tax Exemptions
Like the federal exemption, each of the above states also have their own exemption levels. The higher the exemption, the less chance that state-level estate taxes are due, and the lower the amount of total taxes due. Two states have 2016 exemption levels of $5.45 million, matching the federal exemption. They are Delaware and Hawaii. Below are exemption amounts for the next seven highest states:
Illinois: $4 million
New York: Approximately $3.13 million
Vermont: $2.75 million
Washington: Slightly less than $2.08 million
Maryland: $2 million
Minnesota: $1.6 million
Rhode Island: $1.5 million
Massachusetts, Oregon and the District of Columbia each have exemption amounts of $1 million. The state with the lowest exemption of all is New Jersey, with $675,000, making efficient estate planning crucial.