As much as those of us who live in California can complain about the State’s tax system, we have not had an inheritance tax since the passage of an initiative eliminating it in 1982. There are proposals pending in Sacramento to put an initiative on the ballot to bring back the inheritance tax, and given the ease with which voters appear ready to impose a tax on other people (like those with substantial wealth), we may see the inheritance tax return to California in the next several years. Until then, however, if one is considering fleeing California to reduce taxes, consider the impact of the inheritance or estate tax system of the state to which you move on the estate you will leave upon your death.
Also consider the impact of a state’s inheritance tax system on the portfolio of investment real estate you own in that state even if you remain in California.
If you die in 2018 in Hawaii, Maine or Washington, D.C., you will be able to leave $11.2 million tax free to your heirs. If you live a few years longer, you’ll be able to do the same in Maryland (2019) and Connecticut (2020). That’s because the GOP tax bill doubles the base federal estate tax exemption to a little over $11 million, indexed for inflation for tax years 2018 - 2025.
Forbes notes in its recent article, “Where Not To Die In 2018,” that along with this news, there are two states that are eliminating estate taxes in 2018: New Jersey and Delaware. New York is set to match the current federal exemption amount—a base of just over $5 million indexed for inflation—in 2019. Massachusetts and Oregon now tie for the lowest estate tax exemptions at $1 million per person.
The federal estate tax is 40% on assets above $11.2 million. This tax affects just 1,800 estates in the US next year. However, many more taxpayers pay state estate taxes. The number of state taxable estate tax returns in the state of Oregon alone was 1,563 in 2015. That state’s exemption is just $1 million.
The amount of money you can leave to your heirs without any state death tax depends on where you live and own property, to whom you’re leaving the money and whether your estate planning is current. The highest rates are about 16%, and for inheritance tax states, the tax can apply to the first dollar of assets, meaning there’s no credit like there is on federal estate taxes.
Seventeen states and Washington, D.C. will impose an estate tax or inheritance tax (Maryland has both) in 2018. Eight of these states and DC are making changes for 2018.
New Jersey has repealed its estate tax, but there’s a separate state inheritance tax that hits non-lineal heirs like siblings, nieces, and nephews. The Garden State now is in the group of other inheritance-tax only states: Nebraska, Iowa, Kentucky, and Pennsylvania.
Minnesota and Maryland have scheduled increases to their exemption amounts, and Connecticut just made scheduled changes to its exemption in its 2018 state budget. Washington and Rhode Island made minor upward adjustments in their exemption amounts, due to inflation indexing.
These changes do not eliminate the need to do estate planning. You’ll still want to designate a guardian for minor children, name someone to act on your behalf to make medical and financial decisions, if you are incapacitated and have a will that delineates what you want to happen to your assets, when you have passed.
You’ll also want to make an appointment to meet with an experienced estate planning attorney, if you haven’t updated your will lately. There may have been changes in your life or in the law that should be addressed.
Reference: Forbes (December 21, 2017) “Where Not To Die In 2018”