Good news for heirs about estate taxes
It’s not unusual for states to claim that they’re terrific places to live. But increasingly, states are trying to get out the message that they’re also great places to die.
In 2015, four states will increase the amount that’s exempt from state estate taxes, reducing or eliminating the tax that heirs will have to pay.
Maryland raises exemption
On Jan. 1, Maryland’s exemption will increase to $1.5 million from $1 million, Tennessee’s estate tax exemption will jump to $5 million from $2 million, and Minnesota’s exemption will rise to $1.4 million from $1.2 million. On April 1, 2015, New York’s estate tax exemption will increase to $3.125 million from $2.062 million.
More relief is on the way. Maryland and New York will increase their thresholds every year until 2019, when they’ll match the federal exemption (currently $5.34 million). Tennessee’s estate tax will disappear in 2016. Minnesota’s exemption will rise in $200,000 annual increments until it reaches $2 million in 2018.
Lawmakers in states with estate and inheritance taxes are concerned that well-off retirees will vote with their feet, depriving those states of much-needed income tax revenue, said Scott Grenier, a certified financial planner for Baird’s Private Wealth Management group, in Milwaukee. Taxes are one of the most common reasons retirees relocate to another state, Grenier said.
It’s not hard to understand why. Hawaii and Delaware have estate tax exemptions that match the federal level. But 14 states and Washington, D.C., have lower thresholds, with maximum tax rates ranging from 12 percent to 19 percent. New Jersey’s estate tax threshold is just $675,000, which could affect heirs of even relatively modest estates.
But beware inheritance tax
Seven states have an inheritance tax, with maximum rates ranging from 9.5 percent to 18 percent. Unlike an estate tax, which is levied on an estate before it’s distributed, an inheritance tax is typically paid by the beneficiaries. Maryland and New Jersey have both estate and inheritance taxes.
If you live in a state that still has an estate or inheritance tax and you don’t want to move, talk to an estate-planning professional about other tax-saving strategies.
Connecticut is the only state that imposes a gift tax while you’re still alive, but in the remaining states you can take advantage of gifts during your lifetime to reduce the size of your estate.
If you already have an estate plan, make sure it’s regularly updated to reflect revisions in your state’s law. More changes are likely as states try to make their jurisdictions more attractive to retiring baby boomers. For example, legislation has been introduced in New Jersey to phase out the state’s estate tax over a five-year period.
© 2014 Kiplinger’s Personal Finance; Distributed by Tribune Content Agency, LLC.