Your residence will influence whether you owe an estate tax, an inheritance tax, or both.
Taxes are a part of life and even a part of death.
Just ask Benjamin Franklin.
Although you cannot legally avoid payment of all taxes, choices you make can either increase or decrease the amount you owe.
One important factor is where you live.
According to a recent Real Simple article titled “Here’s Which States Collect Zero Estate or Inheritance Taxes” state tax laws can vary significantly.
Two important areas to consider are whether the state levies an estate tax or an inheritance tax.
What are these?
An estate tax is paid to the government from the estate of the deceased individual.
Although the only way to bypass the federal estate tax is to have your estate assets valued below the exemption threshold, choosing where you live can help you to avoid paying an estate tax to your state as well.
Understanding the laws of your state is essential to your tax planning.
You cannot assume the exemption threshold or the tax percentage will be equal to the federal government.
Even if your assets fall below the federal exemption threshold, you could still owe your state a significant estate tax bill.
Currently, 12 states plus the District of Columbia have an estate tax.
These states include Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
Maryland collects both a state estate tax and inheritance tax.
What is an inheritance tax?
An inheritance tax is paid by the individual who receives an inheritance.
Together with Maryland, five other states levy an inheritance tax.
These include Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania.
Perhaps you noticed Kansas and Missouri are on neither list.
Although you will not be subject to an inheritance tax or a state estate tax in Kansas or Missouri, this does not mean you can simply ignore estate planning.
Trusts are commonly used to decrease estate tax liability.
They can also function to bypass probate proceedings and to allow for greater control over the distribution and use of assets.
Gifting is another common method to reduce the taxable estate of an individual.
Although some gifts are subject to taxes, exemptions are available under certain circumstances such as for tuition or medical expenses.
Estate planning can feel messy when family is spread out over longer distances.
Keeping documents updated, organized, and secure yet accessible to those who need them should be a priority.
Doing so can help your loved ones navigate estate and trust administration, as well as applicable estate tax or inheritance tax requirements, when you die.
Reference: Real Simple (Nov. 24, 2021) “Here’s Which States Collect Zero Estate or Inheritance Taxes”