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State Death Taxes Add to Estate Planning Complexity
Uncertainty surrounding the federal estate tax may have estate planners tearing their hair out, but state death taxes can add yet another layer of complexity. At last count there were 21 states, plus the District of Columbia, that imposed an inheritance tax, a free-standing state estate tax, or a “decoupled” remnant of the former credit estate tax. Two of the 21 states (Illinois and North Carolina) have estate taxes that are “hibernating” during the 2010 federal estate tax repeal. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the credit estate tax has been phased out, but is scheduled to reappear in most states in 2011 unless Congress acts.
States generally apply inheritance and estate taxes to their residents and to nonresidents’ real and tangible personal property located within the state. All states provide exemptions or deductions for transfers to qualified charitable organizations, including charitable remainder trusts.
Below is a listing of states with “death taxes” currently on the books:
| State | Type of Tax | Exemptions | Tax Rates |
| Connecticut | Estate and gift tax | Estates under $3.5 million | 7.2% to 12% |
| Delaware | Estate tax | Estates under $3.5 million | Top rate of 16% |
| District of Columbia | Estate tax | Estates under $1 million | Top rate of 16% |
| Illinois* | Estate tax | Estates under $2 million | Top rate of 16% |
| Indiana | Inheritance tax | Spouses, 100%; $100,000 for descendants and parents | 1% to 20% |
| Iowa | Inheritance tax | Spouses and descendants, 100% | 5% to 15% |
| Kentucky | Inheritance tax | Spouses and descendants, 100% | 4% to 16% |
| Maine | Estate tax | Estates under $1 million | Top rate of 16% |
| Maryland | Inheritance tax | Spouses and descendants, 100% | 10% for others |
| Estate tax | Estates under $1 million | Top rate of 16% |
|
| Massachusetts | Estate tax | Estates under $1 million | Top rate of 16% |
| Minnesota | Estate tax | Estates under $1 million | Top rate of 16% |
| Nebraska | Inheritance tax | Spouses, 100%; $40,000 for Descendants, parents, siblings | 1% to 18% |
| New Jersey | Inheritance tax | Spouse/partner/descendants, 100%;Siblings, children’s spouses, $25,000 | 11% to 16% |
| Estate tax | Estates under $675,000 | Top rate of 16% |
|
| New York | Estate tax | Estates under $1 million | Top rate of 16% |
| North Carolina* | Estate tax | Estates under $3.5 million | Top rate of 16% |
| Ohio | Estate tax | Estates under $338,333 | 6% to 7% |
| Oregon | Estate tax | Estates under $1 million | Top rate of 16% |
| Pennsylvania | Inheritance tax | Spouses 100% | 4.5% to 15% |
| Rhode Island | Estate tax | Estates under $850,000 | Top rate of 16% |
| Tennessee | Estate tax | Estates under $1 million | 5.5% to 9.5% |
| Gift tax | Close relatives, $13,000 annually | 5.5% to 16% |
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| Vermont | Estate tax | Estates under $2 million | Top rate of 16% |
| Washington | Estate tax | Estates under $2 million | 10% to 19% |
*Estate taxes in Illinois and North Carolina are suspended during the 2010 repeal of federal estate tax.
Another Avenue to Estate Tax Deductions for Charitable Transfers
A charitable pledge by an individual that is satisfied by his executor following his death is not deductible as a charitable contribution. However, it will qualify for deductibility as a claim against the individual’s estate if (a) it was a contractual obligation created in good faith for an adequate and full consideration in money or money’s worth, or (b) it would have constituted an allowable charitable deduction if it had been a bequest [Reg. §20.2053-5]. Most pledges fall into category (b) and are thus deductible as claims against the estate.
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