Not All State’s Death Taxes Are The Same

Raising The Amount Of Exemption

In total there are 19 states along with the District of Columbia that have favorable death tax advantages. This number is expected to rise by eight more states by the end of 2015. These additional states will be ushering in a number of new changes. In short, the changes include reducing the death tax “bite” through the process of raising the amount of estate tax exemption. They are also showing resolve with regard to indexing estate taxation based on an inflation index, while also doing away with the “cliff” provisions that have historically taxed the first dollar of an estate.

Rethinking A Primary Residence

In truth, the current estate related taxation structure has resulted in a lot of interstate movement by individuals seeking better tax efficiency. For example, in years past, estate planners have seen a considerable number of clients relocate from NJ and other states to New York. All this to avoid state death taxes? When the alternative is paying large sums in estate type taxes, the answer is a resounding – Yes. Those with substantial wealth are “cornered” into having to rethink their primary residence in the interest of improving tax efficiency.

Estate Taxes Levied By States

While in both the state and federal spheres of taxation there is allowance for bequests to a spouse that are indeed tax free, estate focused taxation by states still differs considerably from state to state. As of 2015 the inflation adjusted federal exemption is pegged at $5.43 million. This equates to $5.43 million of an individual’s total estate being fully exempt from estate taxes at the federal level. In addition, there is a 40% tax rate that is then applied to any amount that exceeds the federal exemption. Conversely, estate taxes levied by states are known for exemptions that are much lower in terms of an individual estate. In the realm of state-driven estate taxes, any amount in excess of a states exemption is taxed at a maximum rate of 16%.

Reaching Parity With The Federal Exemption

The most substantial changes to occur recently in estate taxes imposed by states were realized in New York and Maryland. New York in particular instituted sweeping changes that were put into place very quickly. In fact, the changes resulted in the exemption amount going from $1 million to slightly over $2 million. Further good news for NY high-net-worth residents is that the exemption will continue to rise for the next several years until reaching parity with the federal exemption. This is the kind of legislation that more states will likely implement sooner rather than later.

Changes That Are Likely Ahead

One issue with the NY State estate tax is that of the “cliff.” In short, if a resident’s taxable total estate is more than the exemption by an excess of 5%, then the full value of the estate is vulnerable to estate taxes as levied by the state. All else aside, there are more sweeping changes that are likely ahead for most if not all states in the union at some point in time. These changes appear to be happening sooner rather than later, and that is good news for affluent families looking to protect a legacy and high-net-worth earners wishing to provide financial security for their heirs.

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