In December 2017, the House and Senate passed a tax bill that doubled the estate tax exemption from $5.49 million per individual to $11.2 million, starting January 1st, 2018. Without congressional intervention, these tax breaks will be in effect (with annual adjustments for inflation) until 2026.
While this is great victory for estate taxes on the Federal level, it’s important to note that some states still assess their own estate and inheritance taxes. These “death taxes” are charged in addition to any federal estate taxes that your heirs will owe on the assets you intended to leave behind for them.
In this article, we’ve listed the states with estate taxes and their respective exemption amounts. We’ve also included a list of the states that currently assess an inheritance tax, and a few strategies that can help you legally reduce or eliminate these tax liabilities for your heirs.
Quick Article Guide
- What’s the Difference Between Estate Tax and Inheritance Tax?
- Does My State Have an Estate Tax?
- State Estate Tax Exemptions and Rates
- How to Legally Avoid Estate and Inheritance Taxes
- Which Type of Coverage is Best for Funding an ILIT?
- We’re Here to Help
More commonly known as death taxes, both estate and inheritances taxes are the result of someone’s death. On the surface, the concept of these taxes is similar, however, the way each tax is assessed and collected is quite different. Currently six states charge some form of an inheritance tax, and thirteen states including DC have some form of estate taxes.
Estate Tax: Estate taxes are calculated by adding the total value of the deceased’s assets. If the value of these assets does not exceed the current state/federal exemption, no estate taxes are owed. If taxes are owed, they are the responsibility of the estate.
Inheritance Tax: An inheritance tax is calculated as a percentage of the overall value of the inheritance, and it is collected from the recipient. In all six states, spouses are exempt from inheritance taxes, but in some states children or domestic partners might not be.
To learn more about inheritance taxes, please read our recently updated article on state inheritance taxes.
Currently in the United States, 12 states and DC have some form of an estate tax. Like Federal estate taxes, state estate taxes are only levied against an estate if it’s value exceeds their state’s current estate tax exemption. If the total value of your estate does not exceed the exemption, your heirs should not encounter an estate tax issue.
When determining the value of your estate, the IRS will consider your:
- Real estate
- Land/mineral rights
- Savings accounts
- Life insurance
- Business interests
Below we’ve listed each state that charges estate taxes and the amount of the state’s exemption to help you determine if your heirs are facing an estate tax liability.
- Connecticut – $2,600,000
- District of Columbia – $11,200,000
- Hawaii – $11,200,000
- Illinois – $4,000,000
- Oregon – $1,000,000
- Maine – $11,200,000
- Maryland – $4,000,000
- Massachusetts – $1,000,000
- Minnesota – $2,400,000
- New York – $5,250,000
- Rhode Island – $1,537,656
- Vermont – $2,750,000
- Washington – $2,193,000
In the following sections, we’ve broken down each state’s estate tax exemption amounts and estate tax rates.
To keep up with the increasing federal estate tax exemptions, Connecticut increased their estate tax exemption to $2.6 million, up from $2 million in 2017. By 2020, Connecticut’s estate tax exemption is scheduled to match the amount of the federal estate tax exemption. In the table below, we’ve outlined the current estate tax rates for Connecticut in 2018.
|Estate More Valuable Than:||Estate Less Valuable Than:||Estate Tax Rate|
Source: http://www.trustsestateselderlawct.com/blog/new-state-budget-increases-ct-estate-tax-exemption (Cipparone & Zaccaro, P.C.)
DC, Hawaii, and Maine Estate Tax Exemptions and Rates
In the District of Columbia, Hawaii, and Maine, estate taxes are assessed the same way as federal estate taxes are assessed by the IRS. In these states, if your assets exceed the value of the estate, your heirs will be facing a 16% tax rate on the assets that exceed the exemption.
Essentially these states mimic the federal estate tax exemptions, and they expected to continue this course. To learn more about the federal estate tax changes in 2018, please see our article, “Recent Changes to Estate Tax Law (What’s New for 2018).”
Illinois Estate Tax Exemptions and Rates
Illinois’ estate tax exemption remained at $4,000,000 in 2018 with no adjustments for inflation. Like most other states, their highest maximum estate tax is 16% and they do not offer portability for spouses. In contrast, with federal estate taxes, the IRS offers spousal portability which doubles the estate tax exemption for married couples.
Currently, Illinois is not expected to increase their estate tax exemption in the coming years, despite the recent increase to federal estate tax exemption. Illinois also has no plans to adjust their current exemption for inflation, although this may change in the future. Nonetheless, if your estate is worth close to $4 million or more, it may be worth taking a closer look at your estate planning needs.
Oregon Estate Tax Exemptions and Rates
Oregon on the other hand has some of the most aggressive estate tax rates that start at only $1 million with an estate tax rate of 10%. If your estate is worth more than $9 million, your heirs can expect to see tax rates as high as 16%. We’ve displayed Oregon’s estate tax rates for 2018 below:
|Estate More Valuable Than:||Estate Less Valuable Than:||Estate Tax Rate|
|$1,000,000||$1,500,000||$0 + 10%|
|$1,500,000||$2,500,000||$50,000 + 10.25%|
|$2,500,000||$3,500,000||$152,500 + 10.5%|
|$3,500,000||$4,500,000||$267,500 + 11%|
|$4,500,000||$5,500,000||$367,500 + 11.5%|
|$5,500,000||$6,500,000||$482,500 + 12%|
|$6,500,000||$7,500,000||$602,500 + 13%|
|$7,500,000||$8,500,000||$732,500 + 14%|
|$8,500,000||$9,500,000||$872,500 + 15%|
|$9,500,000||$1,022,500 + 16%|
Source: https://www.thebalance.com/overview-of-oregon-estate-tax-laws-3505368 (The Balance)
Maryland Estate Tax Exemptions and Rates
Since 2016, Maryland has been increasing their estate tax exemption by $1 million per year. In 2018, Maryland’s estate tax exemption was set at $4 million and their intention is to match the federal estate tax exemption (originally slated for $5.9 million) by 2019.
With the recent changes to legislation, it’s we can’t determine if Maryland still intends to match the federal estate tax rate exemption but planning for an exemption of $5.9 million is the safest bet. Maryland’s maximum estate tax rates is also scheduled to remain unchanged at 16%.
Massachusetts Estate Tax Exemptions and Rates
Massachusetts and Oregon still offer their residents the lowest estate tax exemptions in the nation, only $1 million dollars, unchanged from 2017. In Massachusetts, the estate tax rate varies from 5.6% to 16%, depending on the overall value of the estate, and in years past they have not adjusted the exemption for inflation.
Despite having the lowest estate exemption in the nation, according to US News, residents of Massachusetts make an average of more than $70,000 a year. In fact, the state of Massachusetts has the 6th highest average income in the United States, so many high income earners will have an estate tax problem.
Minnesota Estate Tax Exemptions and Rates
In May of 2017, Governor Mark Dayton signed a new tax bill that retroactively increased the estate tax exemption to $1.8m on the January 1st. The estate tax exemption is scheduled to continue increasing by $300,000 per year until it reaches $3 million in 2020. As with other tax bills, these exemptions could be changed at any time with changes to legislation.
In addition to increasing the estate tax exemption to $2.4 million in 2018, Minnesota also increased the minimum estate tax rate to 13%. The maximum estate tax rate for estate worth more than $10,100,000 of 16% still applies, although this tax rate could also change in 2020 or sooner.
New York and New Jersey Estate Tax Exemptions and Rates
New York’s estate tax exemption is set at $5.25 million for the current year (2018). However, on January 1st, 2019, the estate tax exemption for New York state is scheduled to match the yet to be released federal estate tax exemption which is estimated to be roughly $11.3 million.
In 2018, New Jersey completely repealed its estate tax. While this is great news for affluent estate owner’s, it may be too soon to start celebrating. Many financial experts have said that they expect New Jersey to reinstatement it’s estate tax in the future.
Rhode Island Estate Tax Exemptions and Rates
In Rhode Island, the estate tax exemption is tied to the Consumer Price Index for all Urban Consumers or the CPI-U. In 2018, Rhode Island announced that is would be increasing its estate tax exemption from $1,515,156 to $1,537,656 to reflect the CPI-U increase of 2.2% from 2017.
Like other states Rhode Island has a maximum estate tax rate of 16%, and they do not allow portability for married couples. Unlike some other states, however, Rhode Island also recognizes same-sex marriages and allows all married couples to leave their entire estate to their spouse tax-free.
Vermont Estate Tax Exemptions and Rates
Since January of 2016, Vermont’s estate tax exemption has been set at $2.75 million per individual. Like Washington state, Vermont does not offer portability for married couples which means spouses cannot combine their exemption amounts. However, Vermont’s maximum estate tax rate is only 16%, which is less than half of the federal estate tax rate of 40%.
In Vermont, estate taxes are also assessed on any property that was given away within two years of the estate owner’s death. This prevents estate owners from gifting away their property and assets when they become ill to avoid estate taxes. Like Federal estate taxes, estate taxes must be paid to the state of Vermont within nine months of the estate owner passing away to avoid property seizure or penalties.
Washington Estate Tax Exemptions and Rates
In Washington state, the individual estate exemption rose from $2.129 million in 2017, to $2.193 million per person in 2018. Washington has the highest estate tax rate in the Nation (up to 20%) and the state does not offer spousal portability.
Spousal portability allows the surviving spouse to utilize their deceased spouse’s unused individual exemption, which effectively doubles the estate’s exemption. Below is the estate tax computation table that is displayed on the Washington Department of Revenue’s website.
Computation of Washington Estate Tax (For Dates of Death 01/01/14 & After)
|If Washington Taxable Estate is at Least...||But Less Than...||The Amount of Tax = Initial Tax Amount...||+ Tax Rate %...||Of Washington Taxable Estate Value Greater Than...|
Source: Washington Department of Revenue.
Note: The Washington taxable estate is the amount after all allowable deductions, including the applicable exclusion amount.
If your facing estate taxes, proper estate planning can reduce your estate tax liability and help your loved ones avoid the IRS, preserving your legacy. The easiest way to provide your surviving family with the money they need to pay the IRS is to purchase a life insurance policy. However, any asset under you control when you pass away is included in your estate’s value, and this includes the death benefit from your life insurance.
To avoid creating a tax liability with your life insurance policy, an ILIT or irrevocable life insurance trust needs to be established with an attorney. The trust must be an “irrevocable” trust because in the eyes of the IRS and your state’s tax board, this type of trust eliminates your direct control of the asset, separating it from your estate. Your irrevocable trust must also be established before you apply for coverage.
When you apply, your trust must be listed as the owner and payor of your life insurance policy to avoid estate taxes. The trust can then be funded with up to $15,000 per year for each beneficiary of the trust, per spouse, to finance the annual cost of your insurance policy. Although you will not have direct control of your insurance, you will be able to appoint your own trustee who will manage the trust accordingly.
A trustee can be a family member who is financially savvy, but most people appoint an attorney, or a bank executive to avoid inter-family conflict. Regardless of whom you appoint, the trustee must act in accordance to the terms of the trust and will ultimately use the death benefit from your life insurance policy to pay the IRS, settling your estate’s tax liability.
The best type of coverage for any estate planning is guaranteed universal life insurance or GUL insurance. A GUL is very affordable, and it provides guaranteed rates and coverage without any investing, just like term life insurance. Most tax attorneys will recommend purchasing a GUL with coverage that is guaranteed until age 110 or later to ensure that their client does not outlive their policy.
At JRC, we specialize with guaranteed universal life insurance, and we’ve helped thousands of clients with their estate planning needs. We can help you determine how much coverage you need to settle your estate tax liability, and we can help you adjust your coverage in the future if estate tax laws change.
Most companies offer GUL insurance until the age of 80, but it will save you a considerable amount of money to lock in your coverage and rates when you are younger. On average, the cost of life insurance increased 11 to 15% per year after the age of 50, so there is no better time to buy coverage than now.
At JRC Insurance Group we represent more than 40 top-rated insurers, and our agency is licensed to sell life insurance in all 50 states and DC. By asking you a few questions about your health and lifestyle, our expert agents will be able to instantly compare rates from dozens of highly-rated insurers, matching you with the best option available.
No matter what state you live in, we can help! Most importantly, our shopping services are free and there is no cost to apply for life insurance. We specialize with helping clients who are in less than perfect health, and we have thousands of affordable, permanent, life insurance options available.
Give us a call today toll free at 855-247-9555, or you can request a free online quote below to compare rates from dozens of insurers. Please select the option for “lifetime” coverage to compare options for guaranteed coverage to age 90 or later.
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