Thought the estate tax debate was a thing of the past? Not so fast.
Even though the fiscal-cliff compromise kept the federal estate tax exemption at its former level of $5 million, many state governments are imposing estate or inheritance taxes on more modest amounts.
With many states suffering from budget shortfalls, estate tax revenue is more important than ever in keeping government programs running. And that means that some states are hitting the heirs of the recently deceased in the pocketbook.
Often, there are steps that you can take during your lifetime that can reduce or eliminate the bite that state estate and inheritance taxes will take out of the assets you leave behind. An attorney who specializes in estate planning in your state can help you structured your affairs so as little as possible will go to taxes.
Let's take look at the laws in a handful of states.
The Death Tax Is Alive and Well
Estate Tax Is Alive and Well, and States Are Dying for the Revenue
New Jersey imposes both estate taxes and inheritance taxes. Estates greater than $675,000 have to pay state estate tax, with rates on the assets in excess of that amount going as high as 16 percent. That tax comes directly out of the estate of the deceased person, reducing the amount heirs eventually receive.
In addition, inheritance taxes impose a hit on those who receive money from an estate. Certain family members are exempt from the tax, including the spouse, parents, grandparents, children, and grandchildren of the deceased. But siblings and more distant relatives generally have to pay tax at rates between 11 percent and 16 percent, and the tax can apply to transfers as small as $500.
Maryland also has a dual estate tax and inheritance tax system. For assets in excess of $1 million, estates are subject to graduated tax rates of up to 16 percent, and inheritance taxes of 10 percent are charged to non-exempt heirs. Maryland has somewhat broader family exemptions, including siblings, spouses of children, grandchildren, and other direct lineal descendants. But the exemption amount for others is only $150, and the inheritance tax is a flat 10 percent.
Rhode Island only has an estate tax, which it imposes it on estates larger than $910,725. For assets in excess of that amount, the same set of tax brackets applies as in New Jersey and Maryland, up to a 16 percent maximum rate.
Indiana doesn't have an estate tax, but it does have an inheritance tax with a wide range of rates. Real property gets taxed at rate ranging from 1 percent to 10 percent, but most financial assets have higher rates of 7 percent to 15 percent, and rates on business interests start at 10 percent and go as high as 20 percent. Exemptions differ depending on your relationship to the deceased person. Your spouse has an unlimited exemption, and parents, grandparents, children, and grandchildren have $100,000 exemptions. But other family members only get between $100 and $500 before the taxes begin to take effect.
However, Indiana is phasing out its inheritance tax by reducing the tax by 10 percent for those receiving bequests in 2013. That reduction will gradually get bigger in the coming years, but the tax is not slated to disappear until 2022.
Nebraska also has a sole inheritance tax, with rates that go as high as 18 percent. Spouses are exempt, but parents, grandparents, children, grandchildren, and siblings have to pay tax of 1 percent on any asset they inherit in excess of $40,000; more distant relatives like aunts and uncles or nieces and nephews pay 13 percent of what they get above $15,000; and others pay the 18 percent of any inherited amount above $10,000.
On the other side of the coin, Ohio repealed its estate tax effective Jan. 1. That's obviously good news for potential heirs. But it will cost local governments more than $200 million in revenue that they've come to rely on, especially in areas with substantial numbers of elderly citizens.