Beware of State Estate and Inheritance Taxes

Many people are resting easy about estate taxes because of the $5 million federal estate tax exemption. They shouldn’t. Only 27 states have no estate or inheritance taxes. Of the 23 states with the taxes, most impose them at lower levels then the federal tax. Also, because of budget problems, a number of states imposed or increased the taxes the last few years.

You need to worry about state and inheritance taxes when you live in one of the states with the taxes. You also need to be especially careful when you own real estate in or reside in more than one state. For a list of the current state tax picture, go to http://mcguirewoods.com/news-resources/item.asp?-item=1616. (Ignore the second hyphen, but not the first.)

There are four different types of state taxes on estates and inheritances. Knowing how they differ and which one a state imposes is as important as knowing the tax rate and the level at which it’s imposed.

Estate tax.

These are similar to the federal tax, but a few states have their own versions instead of mirroring the federal tax.

Pickup tax.

Many of the states use this method because it’s easy to administer. The federal estate law and estate tax return are used, but the state selects its own exemption amount and tax rate table.

Modified pickup tax.

Vermont and Hawaii use the pickup tax method but made some modifications.

Inheritance tax.

This tax is imposed on those who receive the assets instead of on the estate. Some states tax everything received by each beneficiary, while other states exclude some beneficiaries or amounts. This usually is a variation of a pickup tax, because the federal law is the basis. New Jersey and Maryland have both a pickup tax and an inheritance tax.

Readers need to know the estate and inheritance tax situation in every state in which they own real estate or spend time. When any of them has a tax, you need to meet with an estate planner to learn the details. Be sure to state current on the latest changes in the law, because states have been changing them quite a bit.