Unexpected Estate Tax Bills: Protecting Your Legacy from State Surprises
Estate taxes, often a surprise for many Americans, are a critical aspect of financial planning. In the United States, 17 states along with Washington, D.C., impose estate or inheritance taxes, sometimes both. These taxes can fluctuate annually, catching many off guard.
Take the case of John Levere, for instance. Facing a daunting $112,000 tax bill on his late father’s estate in Massachusetts, he experienced a significant turn of events when a retroactive state law amendment reduced his liability to $12,000. This scenario underscores the complexity and unpredictability of state-level estate taxes. Unlike the federal estate tax, which affects only the wealthiest, state thresholds are often much lower, potentially impacting a broader range of estates. This is particularly relevant today, given the recent surge in real estate values.
Understanding the nuances of these taxes is crucial. Estate taxes can be as high as 20% on estates exceeding certain exemption amounts, which vary from $1 million to $12.92 million. Inheritance taxes, on the other hand, are levied on heirs rather than the estate itself, with rates and exemptions varying based on the heir’s relationship to the deceased. For example, in New Jersey, non-spousal heirs like nieces, nephews, or unmarried partners face taxes up to 16% on certain asset levels.
In 2021, estates paid a total of $6.7 billion in state and local death and gift taxes. Interestingly, a significant portion of this revenue comes from smaller estates, not just the wealthiest ones. This was the case for the Yee family, whose primary asset was a family home purchased decades ago, now valued at over $2 million.
States are continually revising their estate and inheritance tax laws. Massachusetts recently doubled its exemption threshold, while Oregon introduced a law exempting up to $15 million of farm, forestry, and fisheries property from its estate tax. Similarly, changes are occurring in inheritance tax laws, with states like Iowa phasing out their inheritance tax and Nebraska reducing its top rate.
For those living in or inheriting from someone in a state with these taxes, it’s vital to stay informed. Watch for “estate-tax cliffs,” where small increases in estate value can lead to disproportionately high taxes. Regularly check for inflation adjustments in exemption amounts and be aware that owning property in a taxed state can incur liabilities, even for nonresidents.
In conclusion, estate planning in the context of state taxes requires careful consideration, especially for real estate-heavy estates. Strategies like gifting assets or setting up specific trusts can mitigate tax burdens. As always, consulting with a financial advisor or estate planning attorney is advisable to navigate these complex waters.
Legal Disclaimer: This article is for informational purposes only and is not intended as financial, legal, or tax advice. Estate and tax laws are complex and subject to change. Please consult with a qualified professional for advice tailored to your specific circumstances. Investing involves risks, including the potential loss of principal.
