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Page 7 of 21 |
Do states tax estates? |
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Yes, all states impose some kind of tax on the transfer of assets upon death (called the "death" tax). The form and amount of tax varies widely:
(1) Some states tax the value of the decedent's estate.
(2) Others impose a tax on those who inherit the assets of the estate. The tax may or may not fall outside the immediate family. This tax is not tied to the federal credit.
Prior to the 2001 federal tax legislation that phased out the "death tax", most states just took a share of the federal tax (called a "soak-up" or "pick-up" tax because it collects ("soaks up") the tax that would otherwise go to the federal government). However, the impact of the federal legislation resulted in decreasing the federal share that went to the states (falling to zero in 2005). To avert this loss in revenue, many states (such as Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia, Washington, Wisconsin, and District of Columbia) are breaking away from the changes in the federal tax and enacting their own. The new state modifications take different forms and adopt different approaches. For example, Rhode Island freezes its estate tax by referencing the federal tax law as of January 2001. Massachusetts, on the other hand, provides its own estate tax exclusion but Illinois follows the federal limits but freezes them at $2 million in 2009. It is expected that many other state legislatures, faced with budget shortfalls, will change their laws in order to keep collecting estate tax. It makes sense to get advice from an accountant or estate planning attorney in consideration of these new rules. (One tactic is to move to another state without one.)
Some states also impose a generation-skipping tax.
If the decedent leaves property in several states, generally, your estate will be taxed on a proportionate part of the federal credit. |
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