On January 1, 2021, the Federal Estate Tax exemption is set to increase again from $11.58 million to $11.7 per individual. Without congressional intervention, these tax breaks will continue to be in effect (with annual adjustments for inflation) until 2026.
While this is great news 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?
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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 will be facing an estate tax liability in the year 2021.
- Connecticut – $7,100,000
- District of Columbia – $4,000,000
- Hawaii – $5,490,000
- Illinois – $4,000,000
- Oregon – $1,000,000
- Maine – $5,800,000
- Maryland – $5,000,000
- Massachusetts – $1,000,000
- Minnesota – $3,000,000
- New York – $5,850,000
- Rhode Island – $1,579,922
- Vermont – $5,000,000
- Washington – $2,193,000
In 2019, California Senator Scott Wiener introduced an estate tax bill. But, it never made it to the floor for a vote. If successful, SB 378 would have levied a 40% estate tax against individuals and married couples with a net worth of more than $3.5 million and $7 million, respectively.
In the following sections, we’ve broken down each state’s estate tax exemption amounts and estate tax rates.
On October 31, 2017 Governor Dannel Malloy signed the budget act of 2018-2019 into effect. This bill will annually increase the state’s estate tax exemption until it matches the federal estate tax exemption of $11.7 million in 2023.
Currently Connecticut’s estate tax exemption is scheduled to increase from $5.1 million to $7.1 million in 2021. In the table below, we’ve outlined the current estate tax rates for Connecticut in 2021.
|Estate More Valuable Than:||Estate Less Valuable Than:||Marginal Tax Rate|
District of Columbia Estate Tax Exemptions and Rates
In September, the mayor of the District of Columbia signed the “Estate Tax Adjustment Amendment Act of 2020” into law. This act reduces the current estate tax exemption from $5,762,400 to $4 million dollars in 2021.
Under the new law, the District of Columbia will use a graduated tax rate of up to 16% for estates worth more than $10 million dollars. They also plan to annually increase the estate exemption to correspond with inflation and increases to the state’s cost of living.
Hawaii Estate Tax Exemptions and Rates
Hawaii was initially planning to match the federal estate tax exemption by 2019, but this no longer the case. Legislation was passed in 2019 to establish the current estate tax exemption of $5,490,000.
In September, the state also increased it’s progressive estate tax rate to as high as 20% for estates valued at more than $10 million. As of November 2020, there are no plans to increase the amount of the exemption in 2021.
Illinois Estate Tax Exemptions and Rates
Illinois’ estate tax exemption will remain at $4,000,000 in 2021 with no adjustments for inflation. Like many 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 amount. And, despite the recent increase to federal estate tax exemption, the state has no plans to adjust for inflation either.
Oregon Estate Tax Exemptions and Rates
Oregon is home to some to the most aggressive estate taxes in the Nation. Like Massachusetts, there estate tax exemption is set at only $1 million with an estate tax rate that starts at 10%.
If your estate is worth more than $9 million, your heirs can expect to see an estate tax rate of 16%. We’ve displayed Oregon’s estate tax rates for 2021 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: The Balance
Maine Estate Tax Exemptions and Rates
In September 2018, Maine passed legislation to cap their estate exemption at $5.6 million with annual adjustments for inflation. In 2021, Maine’s estate tax exemption will increase to $5.8 million without portability.
The state also levies a progressive tax rate that ranges from 8% to 12% for estates valued at more than $3 million. The highest tax rate is reserved for estates valued at more than $6 million. To learn more about the federal estate tax changes in 2021, please see our article, “Recent Changes to Estate Tax Law.”
Maryland Estate Tax Exemptions and Rates
In April of 2018, new legislation was passed to reverse Maryland’s previous decision to match the federal estate tax exemption by 2019.
In 2020, Maryland’s estate tax exemption was set at $5,000,000 and no future adjustments are planned. Maryland’s maximum estate tax rates range from 0.8% to 16% and the state also imposes an inheritance tax of 10%.
Massachusetts Estate Tax Exemptions and Rates
Massachusetts and Oregon still offer their residents the lowest estate tax exemptions in the nation, set at only $1 million dollars each. 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 2020 Minnesota’s estate tax exemption increased from $2.7 million to $3.0 million. Currently, there is no legislation to continue to increase the Minnesota estate tax exemption for 2021.
Minnesota uses a graduated scale to assess an estate’s tax liability and their current estate tax rates range from 13 to 16%. They also have an increased exemption of $5,000,000 for farmers and small business owners.
New York Estate Tax Exemptions and Rates
Like many states, New York’s estate tax exemption has varied widely over the last few years. Prior to 2014, the sixth-wealthiest state was home to some of the worst estate tax laws in the Nation.
In 2019, New York’s estate tax exemption was set to match the Feds, but in April new legislation was introduced to reduce the state’s estate tax exemption amount. The bill passed later that year, and New York’s estate tax exemption was reduced to $5,850,000 for 2020.
In 2021, the state’s exemption is set to increase again to account for inflation but as of November 6, 2020, the official number had not been announced.
New Jersey Estate Tax Exemptions and Rates
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 are expecting that New Jersey will need to reinstatement it’s estate tax in the near future. In years past, the estate tax has produced hundreds of millions of dollars in revenue for the state. For the time being, however, no legislation appears to be in the works.
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. Rhode Island announced that is will be increasing its estate tax exemption of $1,561,719 to $1,579,922 in 2020 to reflect the CPI-U increase of 1.16% from 2019.
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
In 2019, Governor Phil Scott signed H. 451 into law. This will increase Vermont’s estate tax rate to $5,000,000 in 2021. 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
Washington has the highest estate tax rate in the Nation, of up to 20%, and they do not offer spousal portability which allows a surviving spouse to utilize their deceased spouse’s unused exemption.
On the bright side, Washington does not impose a gift tax on its residents, and with proper planning, any potential estate taxes can be reduced or avoided. Proactive giving is one option, but the way to help your heirs avoid an estate tax liability is to create an ILIT, or irrevocable life insurance trust.
Computation of Washington Estate Tax (For Dates of Death 01/01/14 and 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 (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.
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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 50 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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