State-Level Estate Taxes
Some states have state-level estate taxes. This is a tax that would be imposed on the entirety of the taxable portion of an estate before it is distributed to the heirs.
There is a credit or exclusion in these states that can be used to transfer a certain amount before the tax would be levied on the remainder. These exclusions are relatively high, so even if you were to live in a state with an estate tax, you may not have to pay it.
We practice in Ohio, and fortunately, there is no estate tax in our state. However, this does not mean that there is no chance that your family will be forced to pay a state-level estate tax.
If you own property in a state that has an estate tax and its value exceeds the exclusion in that state, the tax could be levied when your estate is being administered.
To provide some insight with regard to the exclusions, the lowest is $1 million in Oregon and Massachusetts, and highest is Connecticut at $9.1 million.
There are a total of 12 states that have state-level estate taxes, and there are also five states that have inheritance taxes. This is a tax that can be levied on distributions to each respective inheritor that is not exempt.
Ohio doesn’t have an inheritance tax either, but if you inherit property that is located in a state with an inheritance tax, it would be a factor for you unless you fall into an exempt category.
The laws are a bit different in every state with an inheritance tax, but a spouse, children, parents, grandparents, and siblings are typically exempt. For your information, the states with an inheritance tax are New Jersey, Kentucky, Pennsylvania, Maryland, and Nebraska.
Federal Estate Tax
While we are on the subject of taxes, we should take a brief look at the federal estate tax. This tax can significantly erode your legacy if you are exposed, because it carries a 40 percent maximum rate.
It would certainly be a heavy hit, but it is very unlikely that your family will be forced to pay it, because the federal exclusion is very significant. In 2022, it stands at $12.06 million.
The estate tax exclusion is portable, so a surviving spouse would have their deceased spouse’s exclusion to add to their own. Another positive rule for married people is the unlimited marital deduction. Unlimited tax-free transfers are allowed between spouses.
If you are exposed to the estate tax, you can just give gifts while you are living to avoid the tax, right? People used to do this way back in the day shortly after the estate tax was enacted, but there has been a gift tax in place continuously since 1932.
Your available estate tax exclusion would be reduced by the amount of taxable gifts that you give while you are living.
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