Where you Die Could Cost you and your Heirs a Pretty Penny by Jeffrey M. Mutnik, CPA/PFS

Posted on July 17, 2017 by Jeffrey Mutnik

High-net-worth U.S. taxpayers who live in certain states have more worries than the federal estate tax taking a bite out of their wealth. The residents in 14 states and the District of Columbia are also subject to estate taxes at the state level, while another six states impose an inheritance tax on assets bequeathed to their residents. The challenge for these taxpayers is that those states have lower exemption thresholds than the federal estate tax, and therefore expose them to greater risk of taxation on their wealth.


In 2017, individuals may exempt $5.49 million from federal estate taxes. For married couples, the exemption is double that amount, or nearly $11 million. Anything above those thresholds would be subject to a flat 40 percent tax rate. Therefore, it may be assumed that federal estate tax would generally apply to only the top 1 percent of ultra-wealthy families. Conversely, residents in states such as Massachusetts and Oregon, which currently have a $1 million estate tax exemption, will theoretically be subject to state level taxation on their estates. The same theory would apply to residents in Connecticut, Maryland, Minnesota, New Jersey, Rhode Island, Vermont and the District of Columbia, whose face an exemption threshold of $3 million or less. Assets above these amounts would incur state-level estate taxes at rates that can be as low as 0.8 percent, or as high as 20 percent. Residents who live in either Maryland or New Jersey must also contend with state inheritance taxes, which are levied on the transfer of assets from a decedent to a named beneficiary, depending on the beneficiary’s relationship to the benefactor.


Non-residents of those states with estate taxes must also be wary of owning property in taxable state jurisdictions. Title to second homes should be structured to not only avoid state estate tax application, but to also avoid costly and time consuming ancillary probate.


Minimizing or even eliminating exposure to estate taxes on both the federal and state levels is possible when taxpayers take the time to plan and develop well-thought-out estate plans. Viable strategies may include gifting assets to heirs during one’s life or creating certain trusts or structures that remove or limit assets includible in a taxable estate. Yet, even with these strategies in place, high-net-worth families must also consider the capital gains taxes that will be imposed on transfers of highly-appreciated assets.


The fate of the federal estate tax is unknown under the current presidential administration, which has called for a complete elimination of the tax. However, even with such a repeal, there is no promise that state-level estate taxes will disappear or become less burdensome to taxpayers who reside in those states.  More than ever, estate planning must encompass state estate tax planning as well as federal and state income tax planning.


The advisors and accountants with Berkowitz Pollack Brant work with high-net-worth families in the U.S. and abroad to maintain tax efficiency, minimize tax liabilities and comply with a complex system of tax laws.


About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms.  He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at