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Interstate Tax Planning Strategies

Interstate Tax Planning Strategies

In addition to the federal estate tax, some states impose their own tax on a deceased person’s property. Some states use an “inheritance” tax, while others use an “estate” tax.

An inheritance tax is based on who receives a deceased person’s property and how the beneficiary is related to the deceased person. The tax is paid by the recipient (your beneficiary), not by your estate. The tax rate usually depends on who inherits the property. Spouses and other close relatives will pay a low rate or perhaps nothing at all. The 6 states that impose an inheritance tax include: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

An estate tax levied by a state is based on the value of the deceased person’s estate and not on who gets what. Even if your estate isn’t big enough to owe federal estate tax, your state may still tax you. The tax rate is usually quite a bit less than the federal estate tax rates. Property left to a surviving spouse is usually exempt from state estate tax, just as it is exempt from federal estate tax. The 16 states that currently impose an estate tax are: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee (ends 1/1/2016), Vermont, and Washington.

Remember that simply owning real estate in one of these states can be enough to trigger the tax – at least on those assets within the state. Your professional advisors can advise you on what you might face in your specific situation, and what options you have to avoid additional taxation.

Many of our clients decide to establish residency in a state that does not levy any taxes after death. In some cases, if you own a home in that state, register to vote there, and have a driver’s license from that state, that is probably sufficient to establish that state as your residence. Other states are extraordinarily aggressive about exerting their tax schemes on anyone who has any contact with the state.

Even if you feel that you can’t afford to buy a second home in one of these states to establish residency, when you calculate what you’ll save in state inheritance or estate taxes, you may find that your savings will cover the cost of that second home.

There are other (less attractive) planning methods to avoid the state inheritance or estate taxes as well. For example, many states do NOT have a state gift tax, so you could literally give everything away on your death bed, and as long as you were still alive when you did it, the assets you gave away would not be subject to the state inheritance or estate tax. Of course, most advisors would definitely frown on “deathbed planning.” Plus, if you did something like that, you’d still have to consider the federal gift tax and other considerations.

As with federal taxes, the importance of your tax and estate planning advisors cannot be underestimated. Just be sure to take the state into account in your planning, and don’t restrict your planning to federal law!

The above facts are current as of 9/11/2015.

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