We have all heard the phrase that nothing in life is certain except death and taxes. Well, there is a particular irony to this, considering that many people are literally subject to death taxes. Technically, there is no such thing as a death tax; but the term is used to refer to either estate or inheritance taxes. Some states are making significant changes in 2015, so let’s take a look at what is happening.
Currently, 19 states and the District of Columbia have some form of death tax. Eight states are making changes starting in 2015 – all of which are in favor of making death a less taxing affair. The changes are happening through either an increase in the exemption or indexing previous fixed exemptions to inflation. There are also federal estate taxes to consider.
Right now, the federal estate tax carries a base exemption of $5 million and is indexed for inflation. This means the current 2014 exemption of $5.34 million is expected to increase up to approximately $5.4 million, depending on the final inflation indexing. In other words, an individual’s estate will not pay any federal estate tax up to the exempt amount; but it will pay 40 percent on every dollar over this amount.
You might be saying to yourself, well I’ve accumulated a decent amount of wealth, but not nearly $5 million worth. This is where state taxes become an important consideration. States typically have lower estate tax rates; however, their exemptions are often far less than the federal exemption. With all the changes going on in various states, some high net-worth individuals might find it worthwhile to move or at least change their primary residency.
The biggest changes in state estate taxes will occur in New York and Maryland. Maryland’s new law progressively increases the exemption amount for the state estate tax from $1 million in 2014 to $1.5 million in 2015; in 2019 it will match the federal exemption at that time. Maryland also has a separate inheritance tax. Direct family members such as spouses, children, parents and siblings are exempt; however, aunts, uncles, nieces and nephews are not and are taxed at a rate of 10 percent.
New York’s changes happen on a similar but faster time frame. The current $1 million exemption increases to just over $2 million for the estates of those who die between April 1, 2014, and April 1, 2015. New York also will eventually rise to where it matches the federal exemption in 2019, but the acceleration will be much faster with the New York exemption rising over the $5 million mark by April 1, 2017.
Other states are increasing their exemptions as well. Tennessee, Minnesota and Rhode Island are increasing their exemptions by specific amounts, while others such as Washington will be indexing their exemption to inflation. This might be the end of whittling away at death taxes as advocates are pushing to repeal the estate tax in certain states. Whether or not repeal will eventually become a reality, it would not be unprecedented. North Carolina and Indiana repealed estate tax laws in 2013.
Given the current and possible future changes in state estate tax laws, it would be prudent for high net-worth taxpayers to consider the tax ramifications of where they live and eventually die. This is especially true for those who already spend time or have homes in multiple states or perhaps plan to move upon retirement. These are situations where you might be able to change your state of residency with a few lifestyle compromises – or you might want to move altogether to pass on more of what you have accumulated to heirs.