Tuesday, September 16, 2014

Why Does it Matter Where I Die? Your State and Estate Taxes

Why Does it Matter Where I Die? Your State and Estate Taxes

I just read an interesting article in Forbes that came out last week titled "Where Not To Die In 2015". There, the author talks about the changing landscape of inheritance and estate taxes across all of the individual states. She quotes an estate planning attorney in New Jersey who has a client who is retired and who is also making $500,000 in income. The retiree is planning on moving his residence from New Jersey to his house in the Hamptons in New York. As the attorney says in the article, "When your bordering state is telling you, 'Come on over!' the pitch is compelling." New Jersey is one of two states (Maryland being the other) that charges an estate tax and a separate inheritance tax.  By contrast, New York recently raised its exclusion for its estate tax from $1,000,000 to $2,062,000 and will gradually raise that exemption limit to $5,250,000 by April 1, 2017. By January 1, 2019, it will be indexed with the federal exclusion amount. As you will see below, that still is not great compared to most states (particularly the ones in the Southeast part of U.S.) but it is step in the right direction for people who want to pass on their legacy to loved ones.

Currently, there are nineteen states and the District of Columbia that have a "death tax", which taxes the estate that someone leaves on a state level in addition to the federal estate tax. Some states, such as New York, charge an estate tax, by which a tax is levied based on the amount of the decedent's estate, and other states, such as Pennsylvania, which charges a tax based on who receives a decedent's property. As far as individual state taxes go, Pennsylvania's is particularly harsh because there is no exemption or exclusion amount for anyone who has to pay the tax (which is essentially everyone but the spouse or underage child of the deceased).

Estate Planning - TaxesFortunately, the trend nationwide is to repeal inheritance and estate taxes. My home state of North Carolina repealed its estate tax in 2013. So did Indiana and Ohio that same year. Kansas and Oklahoma repealed theirs in 2010.

What does this all mean for you? Well, for example, let's say you live in Harrisburg, Pennsylvania and you have an estate valued at $1,000,000. If you intend on leaving everything to your adult children, you would not owe any Federal estate taxes because the current Federal estate tax exemption in $5,340,000. However, the estate will be subject to a 4.5 percent or $45,000 state inheritance tax. If you are childless and want to leave everything to your sister, the state inheritance tax rate skyrockets to 12 percent and the tax due is $120,000. By contrast, the same person intending to leave that same amount in Charlotte, North Carolina, will not have any tax due, whether it is an inheritance tax or an estate tax (assuming that the property is in North Carolina).

The bottom line is that if you have a substantial estate, where you die could have a significant impact on what you plan on leaving to your families. So, for those of you in states such as New Jersey, Pennsylvania, or Maryland, those of us in North Carolina and Florida (and handful of other states) encourage you to come down here to retire!