Estate Taxes & Death Taxes
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All states impose some form of tax on the transfer of assets upon death - this is known as death tax. The form and amount of this tax varies widely per state: Some states tax the value of the decedent's estate; 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. But if a decedent leaves property in several states, generally, your estate will be taxed on a proportionate part of the federal credit.
Prior to the 2001, federal tax legislation phased out the death tax and most states just took a share of the federal tax called a soak-up or pick-up tax because it collects - or "soaks up" - the tax that would otherwise go to the federal government. However, the impact of the federal legislation resulted in decreasing federal share that went to the states (falling to zero in 2005). To avert this loss in revenue, many states such as Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington, 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 and Massachusetts provide their own estate tax threshold, whereas Illinois provides an estate tax exemption of $4 million. 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.