Most people shouldn't be afraid of federal "death taxes." For 2021, only estates worth $11.7 million or more ($23.4 million or more for a married couple) are slashed by federal estate taxes, and only a small percentage of Americans have accumulated that much wealth. Plus, there's no federal inheritance tax to spook your heirs. (Estate taxes are paid by the estate and based on the estate's overall value, while inheritance taxes are paid by an individual heir on whatever property they inherit.)
But don't feel too comfy if your assets are below the federal estate tax threshold—a tax bill from your state could be lurking in the shadows. While a number of states have reduced or eliminated their death taxes over the past decade or so to dissuade well-off retirees from moving to more tax-friendly jurisdictions, 12 states and the District of Columbia still impose an estate tax and six states have an inheritance tax on the books. (Maryland has both!) So if you don't know boo about death taxes and live in one of the states listed (alphabetically) below, beware. Your heirs could be haunted by a state tax collector.
The Constitution State's estate tax exemption amount is $7.1 million for 2021. The tax due is limited to $15 million.
Connecticut is the only state with a gift tax on assets you give away while you're alive. If you made taxable gifts during the year, state law requires that you file a Connecticut estate and gift tax return to identify such gifts. However, taxes are due in 2021 only when the aggregate value of gifts made since 2005 exceeds $7.1 million. Estate and gift tax rates for 2021 range from 10.8% to 12%.
District of Columbia
For 2021, Washington, D.C., estates valued over $4 million are subject to a city estate tax (the exemption amount will be adjusted annually for inflation beginning in 2022). Estate tax rates in the nation's capital for 2021 range from 11.2% to 16%.
At $5.49 million, the Aloha State has one of the higher state estate tax exclusion amounts, and it isn't adjusted annually for inflation. That makes the tax less frightening for Hawaii residents.
The current Hawaii estate tax rates range from 10% to 20%. The highest rate is for estates worth more than $10 million.
Since Illinois is one of the least taxpayer-friendly states in the country for retirees, you shouldn't be startled to hear that it has an estate tax. The exemption amount is $4 million (after inclusion of adjusted taxable gifts), which at least isn't too frightening. The exemption amount isn't adjusted annually for inflation, either.
The Hawkeye State is in the process of phasing-out it's inheritance. However, it won't be completely eliminated until 2025. In the meantime, the tax doesn't apply if the estate as a whole is worth less than $25,000. In addition, no tax is due on property inherited by a spouse, parent, grandparent, great-grandparent, children, stepchild, grandchild, great-grandchild or other lineal ascendant or descendant.
The tax can be hair-raising for other heirs, though. For 2021, brothers, sisters, sons-in-law and daughters-in-law will be hit with a 4% to 8% tax, depending on the value of the property they inherit. Uncles, aunts, nieces, nephews and all other people inheriting property are taxed at rates ranging from 8% to 12%. (The rates will be lowered in 2022, 2023, and 2024. The tax will then be repealed in 2025.)
As with other inheritance tax structures, the amount of Kentucky inheritance tax owed depends on the heir's relationship to the person who died and the value of the inherited property.
The tax isn't scary at all for the decedent's spouse, parents, children, grandchildren and siblings. They don't have to pay the tax.
But it can be a nightmare for other heirs. Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren are taxed at rates ranging from 4% to 16%, depending on the value of the property inherited (the first $1,000 of property is exempt). All other heirs are taxed at rates ranging from 6% to 16% (their exemption is only for the first $500 of property).
The Pine Tree State has one of the less-scary estate taxes, because it only applies to estates worth $5.87 million or more for 2021 (the exemption amount is adjusted each year for inflation). Since most estates aren't that valuable, Maine's tax doesn't ensnare many estates.
Maine's estate tax rates are comparatively reasonable, too. The top rate is only 12%, which is tied with Connecticut for the lowest top rate in the nation.
The Free State's estate tax exemption is $5 million in 2021, plus any predeceased spouse's unused exclusion amount. Rates range from 0.8% to 16%.
While Maryland also has an inheritance tax (with a flat 10% rate), the list of heirs exempt from paying it includes the decedent's spouse, parents, grandparents, children, grandchildren, siblings, son-in-law, daughter-in-law and surviving spouse of a deceased child. In addition, property not exceeding $1,000 passing to any one person is not subject to the tax.
One of only two states with its exemption stuck at $1 million, the Bay State is less friendly to estates than most other states, including neighboring northeastern states that also made our list, such as Rhode Island and Connecticut.
There is an unlimited marital deduction for property left to a surviving spouse and an unlimited charitable deduction for property left to a qualified charity.
The North Star State's exemption for 2021 is $3 million.
But Minnesota looks back to include as part of your estate any taxable gifts made within three years prior to death. Tax rates range from 13% to 16%.
With Nebraska's inheritance tax, the closer the heir's relationship to the decedent, the smaller the tax rate and the greater the exemption (surviving spouses are exempt from the tax). For example, the tax on heirs who are immediate relatives (e.g., parents, grandfparents, siblings, children and other lineal descendants) is only 1% and does not apply to property that is worth less than $40,000. For remote relatives (e.g., uncles, aunts, nieces, nephews), the tax rate is 13% and the exemption amount is $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.
New Jersey imposes an inheritance tax on inherited property with a value of $500 or more.
No tax is imposed on transfers to the decedent's spouse, domestic partner, parents, grandparents, children and their descendants, or step-children (step-grandchild and their descendants are not exempt). The first $25,000 of property inherited by a decedent's sibling, son-in-law or daughter-in-law is also exempt. After that, they must pay the inheritance tax at rates ranging from 11% to 16%. All other individual heirs pay a 15% tax on the first $700,000 of inherited property and a 16% tax on everything over $700,000.
For 2021, estates exceeding $5.93 million are subject to New York's estate tax (the exemption threshold is adjusted each year for inflation). Taxable gifts made by the decedent as a New York resident within three years prior to death are included as part of the estate. Tax rates range from 3.06% to 16%.
The New York estate tax is a "cliff tax." That means if the value of the estate is more than 105% of the current exemption, the exemption won't be available and the entire estate will be subject to state estate tax.
The Beaver State is the most frightening place in the U.S. to die if you're concerned about estate taxes. Oregon has resisted the trend to raise its estate tax exemption (or even adjust it for inflation). The state's estate tax still kicks in for estates valued at as little as $1 million. In addition, it also imposes a relatively high 10% tax rate on even the smallest of qualifying estates.
The Keystone State has an inheritance tax, but it doesn't apply to property inherited by the decedent's spouse, parents (if the decedent is age 21 or younger), or child age 21 or younger. The tax is imposed at a 4.5% rate for the decedent's parents (except if the decedent is 21 years old or younger), grandparents, lineal descendants, son-in-law, or daughter-in-law.
The rate is 12% for people who inherit property from a sibling and 15% for all other heirs. A 5% discount is allowed if the tax is paid within three months of the decedent's death.
Although the Ocean State adjusts its estate tax exemption annually for inflation, it still has a fiendishly low threshold. At only $1,595,156 for 2021, Rhode Island's exemption amount is one of only three in the nation that is less than $2 million. Rates range from 0.8% to 16%.
Vermont has an estate tax with an exemption of $5 million for 2021. The estate tax rate in the Green Mountain State is a flat 16%.
An estate tax is imposed by Washington on estates exceeding $2.193 million (the exemption threshold is subject to adjustment each year for inflation). Tax rates range from 10% to 20%.
The state offers an additional $2.5 million deduction for family-owned businesses valued at less than $6 million.