States Are Lowering Their Estate Taxes to Lure Retirees
July 9, 2015Posted by Steven Maimes, Contributor – on November 5th, 2014
From Kiplinger’s Personal Finance by Sandra Block
Several states are increasing their estate-tax exemptions.
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. On January 1, Tennessee’s estate tax exemption will jump to $5 million from $2 million, Maryland’s exemption will increase to $1.5 million from $1 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. Tennessee’s estate tax will disappear in 2016. Maryland and New York will increase their thresholds every year until 2019, when they’ll match the federal exemption (currently $5.34 million). Minnesota’s exemption will rise in $200,000 annual increments until it reaches $2 million in 2018.
In the past, most people didn’t have to worry about state estate taxes. Federal law provided an estate tax credit that reduced the federal tax bill by the amount paid in state estate taxes. In 2005, though, the credit was repealed, leaving big gaps between federal and state estate tax thresholds in the states that still had estate taxes on the books. The 2013 law that lifted the federal estate tax threshold to more than $5 million (adjusted for inflation) ensured that the tax remains a nonissue for the vast majority of taxpayers. But state estate taxes remain a real threat to some family legacies.
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, says 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 says.
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% to 19%. New Jersey’s estate tax threshold is just $675,000, which could affect heirs of relatively modest estates. Seven states have an inheritance tax, with maximum rates ranging from 9.5% to 18%. 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. (Minnesota enacted a gift tax in 2013 but repealed it earlier this year.)
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.
Source: kiplinger.com
Posted by: Steven Maimes, The Trust Advisor