Estate taxes are not going away any time soon.
You have heard of estate taxes.
Even so, your knowledge of them is limited.
You know the exemption threshold has risen in recent years.
You also seem to recall hearing that not all states have an estate tax, but that there is a federal tax.
Because of this, you may think estate taxes will soon be a thing of the past.
According to a recent Kiplinger article titled “State Estate Taxes Not Dead Yet,” this is unlikely.
Here is a brief history of the estate tax.
All states had their own estate tax at in 2000.
At this time, the federal estate tax law provided a dollar-for-dollar credit for up to 16 percent of paid state inheritance and estate taxes.
This allowed for states to receive funds from their residents without creating an additional tax burden.
It was known as a “pick-up” tax.
The law changed in 2001 to eliminate the federal credit gradually.
The credit was repealed completely in 2005.
When this happened, a state estate tax became an additional tax burden to those already paying the federal tax.
When this happened, more than 20 states chose to eliminate their own estate tax to minimize the risk of wealthy residents fleeing to another state.
More states followed suite.
Now only 12 states and Washington D.C. have a state estate tax for their residents.
Fortunately, the current federal estate tax exemption is high.
This means many people who live in states with an estate tax need only pay at the state level estate tax.
Estate taxes are not the only taxes levied when a person dies.
Your heirs may owe an inheritance tax.
While estate taxes are paid on the value of the estate by the estate, inheritance taxes are paid by each individual heir on property received based on their degree of relationship to the decedent.
There are currently six states with an inheritance tax.
Kansas and Missouri are not included in the six.
What happens if you live in a state with an inheritance tax?
Some states have exemptions for close relatives.
Other states have smaller taxes for close relatives and higher taxes for more distance relatives.
Wherever you and your heirs reside, it is important to work with an experienced estate planning attorney to create a tax-efficient estate plan.
Reference: Kiplinger (Feb. 3, 2020) “State Estate Taxes Not Dead Yet”