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States With Scariest Death Taxes -- Estate Taxes, Inheritance Taxes

By: Kiplinger
Posted: 12/27/2013 9:16:00 AM
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Federal estate taxes are no longer a problem for all but the extremely wealthy. In 2015, as much as $5.43 million in assets will be exempt from federal estate taxes--double that for a married couple.

However, state estate taxes, which kick in for estates valued at only $1 million or less in several states, could take a big bite out of your legacy. Your home and retirement accounts will be counted when your estate is valued for tax purposes, and proceeds from your life insurance could be counted, too, depending on how the policy is owned and who gets the money.

Sixteen states and the District of Columbia impose an estate tax, and seven states impose an inheritance tax, which can force certain heirs to give up a portion of their inheritance. The good news is that a growing number of states are increasing their estate-tax exemptions in an effort to dissuade well-off retirees from moving to more tax-friendly jurisdictions. In 2015, four states will increase their estate-tax exemption, and more relief is scheduled over the next five years.

Here's a look at the states that are the least friendly places to die.

1. New Jersey

Exemption level before state estate tax kicks in: $675,000

State estate tax rates: 4.8% - 16% (on estates valued at about $10 million or more)

Exempt from estate tax: Spouses, civil union partners

Inheritance tax: Yes

New Jersey lawmakers have proposed making the Garden State's estate tax less onerous, but nothing has happened yet. New Jersey remains one of only two states (along with Maryland) to impose both estate and inheritance taxes. And New Jersey's exemption level at which estate taxes kick in is, by far, the lowest in the country.

Parents, grandparents, descendants, children and their descendants, spouses, civil union partners, domestic partners and charities are exempt from the state's inheritance tax. There is also a $25,000 per-person exemption for siblings, sons-in-law and daughters-in-law. But other heirs are taxed at graduated rates ranging from 11% to 16% on inheritances valued at $500 or more.

New Jersey also "looks back" to gifts made to non-exempt individuals within three years prior to death. Such gifts are also subject to the inheritance tax unless beneficiaries can prove that the gifts weren't made "in contemplation of death."

2. Oregon

Exemption level before state estate tax kicks in: $1 million

Estate tax rates: 10% - 16% (on estates valued at $9.5 million or more)

Exempt from estate tax: Surviving spouses and registered domestic partners

Inheritance tax: No

The Beaver State moves up to the No. 2 spot from No. 4 last year because it has resisted the trend to increase its estate-tax exemption (or even adjust it for inflation). The state's tax still kicks in for estates valued at as little as $1 million. In addition, it also imposes a relatively high 10% tax rate on those smaller estates.

3. Massachusetts

Exemption level before state estate tax kicks in: $1 million

Estate tax rates: 5.6% - 16% (on estates valued at more than $10 million)

Exempt from estate tax: Spouses only

Inheritance tax: No

Massachusetts moves up our list, from No. 7 in 2013, because starting in 2015, its exemption (stuck at $1 million) will lag that of several other states, including neighboring Rhode Island.

In addition to the exemption for spouses, the Bay State allows an unlimited charitable deduction for property left to a qualified charity.

4. Minnesota

Exemption level before state estate tax kicks in: $1 million

Estate tax rates: 5.6% - 16% (on estates valued at about $10 million or more)

Exempt from estate tax: Spouses only

Inheritance tax: No

The North Star State will also gradually increase its estate-tax exemption by $200,000 a year until 2018, when it will reach $2 million. Even then, though, there will be a significant distance between the state's estate-tax threshold and the federal exemption.

Not only does Minnesota have a low exemption level for estates, but when calculating the value of your estate, Minnesota looks back to include taxable gifts made within three years prior to death. Good news: In March 2014, Minnesota repealed a 10% gift tax enacted in 2013 before anyone actually had to pay it.

5. Rhode Island

Exemption level before state estate tax kicks in: $921,655 in 2014; $1.5 million in 2015.

Estate tax rates: 5.6% - 16% (on estates valued at about $10 million or more)

Exempt from estate tax: Spouses only

Inheritance tax: No

The Ocean State moves down from last year's No. 2 spot because its estate-tax threshold jumped significantly above $1 million for 2015--and will continue to be adjusted annually for inflation.

6. Maryland

Exemption level before state estate tax kicks in: $1 million; $1.5 million in 2015.

Estate tax rates: 5.6% - 16% (on estates valued at about $10 million or more)

Exempt from estate tax: Spouses only

Inheritance tax: Yes

The Free State is gradually becoming a more tax-friendly place to die. Its estate-tax exemption will increase every year until 2019, when it will match the federal exemption. For that reason, it moves down one spot on our list.

Spouses, children, daughters- and sons-in-law, parents, grandparents and siblings are exempt from the state's inheritance tax. But other heirs must pay a 10% tax on bequeathed property valued at $1,000 or more. Gifts made within two years prior to death may also be subject to the tax.

7. Connecticut

Exemption level before state estate tax kicks in: $2 million

State estate tax rates: 7.2% - 12% (on estates valued at about $10 million or more)

Exempt from estate tax: Spouses, civil union partners

Inheritance tax: No

The Constitution State is the only state with a state gift tax on assets you give away while alive. You'll have to file Connecticut gift tax returns every year to identify any such gifts, but taxes are due (at rates ranging from 7.2% to 12%) only when the aggregate value of gifts made to any individual since 2005 exceeds $2 million.

8. Maine

Exemption level before state estate tax kicks in: $2 million

Estate tax rates: 8% - 12% (on estates valued at more than $8 million)

Exempt from estate tax: Spouses only

Inheritance tax: No

In the Pine Tree State, even if no estate tax is due, your estate must file an abbreviated version of the estate tax return to remove an automatic tax lien on all Maine property in the estate.

9. Washington

Exemption level before state estate tax kicks in: $2.012 million

Estate tax rates: 15% - 19% (on estates valued at more than $9 million)

Exempt from estate tax: Spouses

Inheritance tax: No

The Evergreen State's estate tax rates are unusually high. But Washington offers an additional $2.5 million deduction for family-owned businesses valued at less than $6 million. Its estate tax exemption is indexed to inflation.

10. New York

Exemption level before state estate tax kicks in: $1 million

Estate tax rates: 5.6% - 16% (on estates valued at more than about $10 million)

Exempt from estate tax: Spouses only

Inheritance tax: No

Because the Empire State recognizes same-sex marriages, same-sex spouses are also exempt from estate taxes.

10 States With the Scariest Death Taxes-- 2013 Rankings

1. New Jersey
2. Rhode Island
3. Minnesota
4. Oregon
5. Maryland
6. New York
7. Massachusetts
8. Connecticut
9. Maine
10. Washington

Kiplinger updates these rankings annually. Above is our 2013 list of the states with the scariest death taxes. The list is based on Kiplinger's analysis of state tax laws; information is gathered from state tax department Web sites, CCH and the Tax Foundation.