The Death Tax Is Alive and Well

States are taking up where the IRS left off.

By Dan Caplinger

Thought death taxes were a thing of the past? Not so fast.

Even though the fiscal-cliff compromise kept the federal estate tax exemption at its former level above $5 million, many state governments are picking up the slack and imposing estate or inheritance taxes on much more modest amounts.

With many states seeing budget shortfalls, death tax revenue is more important than ever in keeping governments running. And that means that some states are hitting the recently deceased and their loved ones in the pocketbook.

Often, there are steps that you can take during your lifetime that can reduce or eliminate the financial impact that state estate and inheritance taxes will have on your loved ones. By talking to an attorney who specializes in estate planning in your state, you can make sure you have your affairs structured so as little as possible will go to taxes.

Now let's look at the laws in a handful of states.

New Jersey
New Jersey imposes both estate taxes and inheritance taxes. Estates greater than $675,000 have to pay state estate tax, with rates on the excess going as high as 16 percent. That money comes directly out of the estate of the deceased person, reducing the amount heirs eventually receive.

In addition, inheritance taxes impose an additional hit on those who receive money from an estate. Certain family members are exempt from the tax, including the spouse, parents, grandparents, children, and grandchildren of the deceased. But siblings and more distant relatives generally have to pay tax at rates between 11 percent and 16 percent, and the tax can apply to transfers as small as $500.

Maryland also has a dual estate tax and inheritance tax system. Estates above $1 million are subject to graduated rates of up to 16 percent, and inheritance taxes of 10 percent are charged to those who aren't eligible for an exemption. Maryland has somewhat broader family exemptions, including siblings as well as spouses of children, grandchildren, and other direct lineal descendants. But the exemption amount for others is only $150, and the rate of tax is a flat 10 percent.

Rhode Island
Rhode Island only has an estate tax, but it imposes it on estates as small as $910,725. The same set of tax brackets up to a 16 percent maximum rate apply as in New Jersey and Maryland.

Indiana doesn't have an estate tax, but it does have an inheritance tax with a wide range of rates. Real property gets taxed at 1 percent to 10 percent, but most financial assets have higher rates of 7 percent to 15 percent, and business interests get hit by rates that start at 10 percent and go as high as 20 percent. Exemptions differ depending on your relationship to the deceased person, with the spouse having an unlimited exemption, and parents, grandparents, children, and grandchildren getting a $100,000 exemption. But other family members only get $100 to $500 before the tax hits.

Fortunately, Indiana is phasing out its inheritance tax by reducing the tax by 10 percent for those receiving bequests in 2013. That reduction will gradually get bigger in the coming years, but the tax won't disappear until 2022.

Nebraska also has a sole inheritance tax, with rates that go as high as 18 percent. Spouses don't have to pay the tax, but parents, grandparents, children, grandchildren, and siblings have to pay tax of 1 percent above $40,000, with more distant relatives like aunts and uncles or nieces and nephews paying 13 percent of what they get above $15,000 and others paying the highest 18 percent above $10,000.

Ohio: bucking the trend
On the other side of the coin, Ohio repealed its estate tax effective Jan. 1. That's obviously good news for potential taxpayers and their families who now won't have to pay the tax. But it will cost local governments more than $200 million in revenue that they've come to rely on, especially in areas that have substantial elderly populations.

Fool contributor Dan Caplinger hopes to stay alive long enough for death taxes to go away. You can follow him on Twitter @DanCaplinger.