With the new $5 million> federal estate tax exemption for 2011 and 2012, most folks are blissfully free of any federal estate tax worries (for now). That's the good news. The bad news: Twenty states and the District of Columbia impose estate or inheritance taxes that kick in below the $5 million mark, and some kick in below $1 million. If you live in one of these places, your estate can be exempt from the federal death tax but still exposed to state death taxes.
Hawaii and North Carolina have $5 million exemptions, but estates worth over that amount will be hit with both the federal estate tax and the state version.
Here's the story on the worst places to die from an estate tax perspective.
16 States and DC Have Estate Taxes
The sixteen states and the District of Columbia, which impose their own estate taxes (as opposed to inheritance taxes, which I will explain later) base their taxes on the entire value of an estate in excess of the applicable exemption.
The exemptions vary from a low of $338,333 to a high of $5 million. Specifically:
* Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000).
* Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does D.C.
* Three states have $2 million exemptions (Illinois, Vermont, and Washington)
* Two states have $3.5 million exemptions (Connecticut and Delaware).
* Two states have $5 million exemptions (Hawaii and North Carolina).
The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.
6 States Have Inheritance Taxes
Six states impose only inheritance taxes, which are assessed on the value of specific inherited assets in excess of the applicable exemption (estate tax is assessed on the entire value of an estate in excess of the applicable exemption).
The inheritance tax exemptions are zero or negligible--except in Tennessee which has a $1 million exemption.
The tax rates are 9.5% in Tennessee, 15% in Iowa and Pennsylvania, 16% in Kentucky, 18% in Nebraska, and 20% in Indiana.
Worst Case: 2 States Have Both
Maryland and New Jersey raise confiscation to a higher level by charging both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is a whopping $150 and the tax rate is 10% (in addition to the 16% estate tax rate). In New Jersey, the inheritance tax exemption is zero and the tax rate is 16% (in addition to the 16% estate tax rate).
The Other 28 States Have No Estate or Inheritance Taxes
The 28 states NOT listed above have no estate or inheritance taxes. They are better places to die.
How the Taxes Add Up
Thankfully, the federal and state tax rates are not just stacked on top of each other.
* If you live in Maryland or New Jersey, the state inheritance tax is subtracted from the value of the estate before calculating the state estate tax.
* State inheritance and estate taxes are subtracted from the value of the estate in calculating the federal estate tax.
Despite these subtractions, you can wind up with some pretty horrific effective combined tax rates when you account for federal and state estate taxes and inheritance taxes. The effective combined rates range from a low of 39.6% in Ohio to a high of 54.1% in New Jersey. These are the maximum rates that would apply to estates worth over $5 million. For instance, if you die in New Jersey with a $15 million estate, the combined federal and state tax hit on the $10 million excess over the federal exemption would be $5,410,000. Ouch!
Here's a handy-dandy map of estate and inheritance tax exemptions and rates.
The Bottom Line
The worst place to die is New Jersey with a combined effective estate and inheritance tax rate of 54.1%. Congrats to the Garden State! In second place is Maryland at 50.9%. Good try! In fact, none of the states mentioned here are good places to die, but some are significantly worse than others. Most of the states listed here are not good places to live either from a tax perspective because they sock it to you with income, property, and sales taxes while you're still kicking.
Taxes are a big part of the reason why New York and New Jersey are losing population, while low-tax states like Florida and Texas are gaining. People will vote with their feet when all else fails. Just don't wait too long to vote!