One of the best pieces of news in recent years is the federal tax exemption of $5.34 million per person and indexed to inflation made permanent. This means, for 2014, as much as $5.34 million of a person’s estate will be exempt from estate federal tax. A flat 40% tax rate will be applied to any excess over $5.34 million. This exemption is high enough to affect millions of people.
Thirty-one states in the Union do not levy any form of estate or inheritance taxes. So, if you die in one of those 31 states, your estate does not owe the state or the federal government taxes – as
long as the value of your estate falls below the personal federal estate tax exemption. On the other hand, 19 states and the District of Columbia levy some form of estate or inheritance taxes. If you want to limit your estate taxes to a minimum, the state you declare as your residence becomes critical.
As an estate planning attorney from Orange County, I counsel my clients, especially those who are in their retirement years to pay particular attention to their state of residence. California does not have a death tax. So if you are a long-time resident of the Golden State, you may as well consider retiring there. If you want to retire elsewhere, you may consider Texas or Florida. (Almost all of the Western, Midwestern and Southern states do not impose any form of death taxes.)
The following states have a state estate tax: Hawaii, Washington, Oregon, Minnesota, Illinois, New York, Connecticut, Rhode Island, Massachusetts, Vermont, Maine, Delaware and the District of Columbia. While Nebraska, Kentucky, Tennessee and Pennsylvania only have an inheritance tax. Maryland and New Jersey levy both an estate and inheritance tax.
The personal exemption in states with estate taxes is generally higher than that for federal estate tax. New York, for one, pegs the threshold at $1 million. So the estate of an individual dying this year in New York with $5.34 million would owe no federal tax, but would owe the state government of New York $431,600.
New Jersey limits the persona; estate tax exemption at $675,000. Above that limit, the estate will have to pay a tax which ranges from 4.2% to 16%. On top of that, siblings, nephews, nieces and friends will be levied an inheritance tax ranging from 11 to 16%.
The examples in the paragraph above should give you reason to pause. If you reside in a state that does not impose estate or inheritance tax and your personal estate is below $5.34 million, then your heirs will recieve their inheritance without having to pay a single cent to the state or federal government. As an estate planning attorney from Orange County, I advise you to consider your state of residence or “domicile state” in your estate planning. The difference is not just geographic; it could mean hundreds of thousands of dollars in death taxes that your heirs will have to shoulder.