The main focus of estate planning right now is the pending sunset of the federal estate tax exemption at the end of 2025. On January 1, 2026, the federal estate tax exemption amount is scheduled to automatically decrease from $13.99 million per person (in 2025) to approximately $7 million per person in 2026. Although federal estate tax is an important consideration in an estate plan, there is another issue affecting taxpayers’ estates that is often overlooked. Some states impose their own separate estate or inheritance tax with much lower exemption amounts than the federal level. In such states, a comprehensive estate plan must deal with both federal and state taxes.

Key Considerations

Estate Tax Versus Inheritance Tax

Estate tax is imposed on a deceased person’s estate before assets are distributed to beneficiaries. The estate is responsible for the payment of any estate tax due. Estate tax is imposed by the federal government and some states.

Inheritance tax is imposed on the beneficiaries receiving an inheritance. For states that impose an inheritance tax, certain family member beneficiaries are often exempt from the tax. There is no federal inheritance tax.

State Estate Taxes

Twelve states and the District of Columbia impose a state estate tax, including Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

The state estate tax exemption amounts vary by state and are from as low as $1 million (e.g., in Oregon) to $13.61 million in Connecticut, though other states tend to fall somewhere between $3 million and $5 million.

Estate tax rates vary but typically range between 10%–20%, depending on the value of the estate.

Inheritance Tax States

Six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose inheritance taxes.

Beneficiaries closer in relationship to the deceased (e.g., spouses and children) may receive exemptions or lower rates. In contrast, distant relatives or nonrelatives often pay higher rates, up to 16%.

Portability and Residency

Unlike federal law, many states do not allow “portability,” whereby any unused portion of the deceased spouse’s state estate tax exemption can be transferred to the surviving spouse.

Residency and location of assets can also affect tax liability. For example, real estate is typically taxed in the state where it is located, while other assets are taxed in the deceased’s state of residence.

No State Estate/Inheritance Tax

Most states, including Florida, Texas, and California, have neither estate nor inheritance taxes, making them more attractive for estate tax purposes.

Planning Considerations

A common strategy to deal with state estate tax is to relocate during retirement to a state without an estate tax. If that is not an option, it is essential to consider the effect of state estate or inheritance tax and how those taxes affect an estate plan. Because most state estate tax exemptions are lower than the federal exemption, the standard strategies used for federal estate tax purposes may result in state estate tax having to be paid at the death of the first spouse instead of deferring them to the death of the second spouse.  Fortunately, most states provide strategies to alleviate this burden. The intersection of state and federal estate and inheritance taxes is complex. The use of qualified professionals is essential in obtaining a successful result.

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