If you live in the United States, even death won't allow you to escape the taxman. The Internal Revenue Services taxes large estates -- as of 2017, those valued at $5.49 million or higher -- when they're passed on to the owner's heirs. Fourteen states and the District of Columbia will also collect a tax on your estate if it exceeds a certain dollar value.
Another six states collect an inheritance tax from your heirs. And two states will actually double-dip, taxing both your estate and the inheritance your loved ones receive when you pass away.
Estate and inheritance taxes are not assessed in every situation. The heirs you choose and the value of your estate are key factors determining whether the government will stake a claim on assets that you leave behind. It's important to know the rules where you live, especially if your estate is a larger one.
Here's a quick guide so you'll know whether a portion of your assets will go to pay a big tax bill after you pass away.
Which states assess an estate tax?
There are 14 states with an estate tax, and the District of Columbia has one as well. When a state collects estate taxes, it establishes an exemption for smaller estates; yours will only have to pay if it is worth more than the exemption amount. Typically, no tax is assessed if you leave your assets to a spouse who is a U.S. citizen.
These are the exemptions amounts and tax rates, as of 2017, for locales throughout the U.S. that charge estate tax:
|State||Exemption Amount||Tax Rate|
|Connecticut||$2,000,000||7.2% to 12%|
|Delaware||$5,490,000||0.8% to 16%|
|Hawaii||$5,490,000||0.8% to 16%|
|Illinois||$4,000,000||0.8% to 16%|
|Massachusetts||$1,000,000||0.8% to 16%|
|Maine||$5,450,000||8% to 12%|
|Minnesota||$1,800,000||9% to 16%|
|New Jersey||$2,000,000||0.8% to 16%|
|New York||$5,250,000||3.06% to 16%|
|Oregon||$1,000,000||10% to 16%|
|Rhode Island||$1,515,156||0.8% to 16%|
|Vermont||$2,750,000||0.8% to 16%|
|Washington||$2,129,000||10% to 20%|
|Washington, D.C.||$2,000,000||0.8% to 16%|
Estate taxes are paid by your estate, and its taxability -- and tax rates -- are determined by how much it's worth when you pass away. Virtually all property you own is included when valuing your estate, including real estate, tangible and intangible personal property, insurance, and even assets held in certain types of trusts.
Which states assess an inheritance tax?
An inheritance tax is different from an estate tax. Inheritance taxes are paid by the people who receive money or property after a death. The value of a deceased person's total estate doesn't matter as much when determining whether inheritance taxes must be paid. Instead, the relationship of the deceased to the person who inherits is the key factor determining whether tax is collected, and in what amount.
For example, in Pennsylvania, if you transfer assets to a child over 21 or to a grandchild, your descendant will pay a 4.5% inheritance tax on those assets. If you transfer assets to a sibling, your brother or sister will pay 12%. And if a friend inherits, your friend will pay a 15% tax.
There are six states with inheritance taxes, two of which -- Maryland and New Jersey -- also have estate taxes. The states with inheritance taxes, and the tax rates for each, are as follows:
|Iowa||0% to 15%|
|Kentucky||0% to 16%|
|Maryland||0% to 10%|
|Nebraska||1% to 15%|
|New jersey||0.8% to 16%|
|Pennsylvania||0% to 15%|
Some states allow some property to pass without inheritance tax being assessed. In Iowa, for example, no inheritance tax is charged if the deceased person's net estate is valued at $25,000 or less. Others will provide different exemption amounts depending upon who inherits. In Kentucky, a cousin who inherits is taxed as soon as an inheritance is $500 or greater, while a niece or nephew is taxed only on an inheritance of $1,000 or more. The general rule is: the closer the family member, the larger the exemption.
Do you always have to pay?
If your estate value exceeds the exemption for estate tax and you leave money to anyone other than your spouse, then your estate must pay as required. Likewise, if valuable assets are left to someone who isn't exempt from inheritance tax, that person must pay the taxes due.
However, there are some special rules. For example, a special-use valuation for family farms makes it possible for some families to pass on valuable farmland without triggering federal estate tax. This ensures that families don't have to sell their land to pay a tax bill if there are few liquid assets in the estate.
It's also important to be aware of tools you can use to reduce estate and inheritance taxes. Inter vivos gifts (gifts during your life), family limited partnerships, and certain types of trusts are among the estate planning tools that may allow you to pass on money tax-free.
Creating an estate plan can be complicated, especially when your estate is large enough that you're concerned about estate and inheritance taxes. It is a good idea to talk with a lawyer about how to reduce or avoid taxes that could be triggered upon your death.