Not all states are created equal, whether that be for business, for beaches, or . . . for dying. Forbes just released its perennial rundown about State death and inheritance taxes: where not to die in 2012.
As you may know, the Federal government isn’t the only level of government to impose wealth transfer taxes. In fact, 13 states and the District of Columbia impose an estate tax, generally with exemption amounts hovering around $1-2 million (far below the current federal “coupon” of $5.12 million) and with a tax rate generally pegged at 16 percent.
Among the several states, Ohio offers the lowest rate at seven percent while Minnesota tops out at 41 percent. Six states impose an inheritance tax, which hits the recipient of the inheritance rather than the estate from which the inheritance came. Two states impose both estate and inheritance taxes: Maryland and New Jersey.
As we head into 2012, it’s worth noting that there has been a lot of movement regarding State death taxes, and it is likely that there is more to come. Some States are keeping their current rates or simply indexing them for inflation, while still others are making significant changes.
Connecticut, for one, lowered its exemption amount, retroactively to January 1, 2011, to $2 million. The exemption had previously been $3 million. There were also some taxpayer-friendly changes, such as Maine's raising its exemption amount to $2 million (up from $1 million) and Vermont's raiding its ecemption to $2.75 million (up from $2 million).
Ohio repealed its estate tax, but that isn’t effective until 2013. Until then, Ohio boasts the lowest exemption amount ($338,333), with New Jersey set to take up that onerous title come next year ($675,000).
What other States are rumbling? Strong movements are underway to end death taxes in States like Indiana, Tennessee, Nebraska, and Oregon, according to the American Family Business Institute. Also, Pennsylvania has just passed a “carve-out” exemption from the State inheritance tax for farmers.
Hawaii's estate tax exemption remains at $3.5 million with rates between 0.8% and 16%. The differential between the Federal and State exemptions means that your estate plan must be carefully reviewed if you want to avoid some unintended tax consequences when you die. Most plans are geared toward the Federal exemption without taking the State exemption into account. Prior to 2010, that worked just fine in Hawaii, because we did not have an estate tax. Now that we do, it pays to have an estate plan "check up."
As James Walschlager, an analyst with tax publisher CCH, put it: “Most of the states are still in pretty poor shape, and if the economy doesn’t improve you might see more action by state legislatures seeking other sources of revenue.”
You can find more information about estate tax planning here.