Estate Planning Tip: Watch Out for State Taxes

Estate Planning Tip: Watch Out for State Taxes

When people begin estate planning, they probably think about the federal estate tax (commonly referred to as the “death” tax). However, a lesser-discussed tax issue is state estate and inheritance taxes.

This is a complex, state-based issue and it’s advisable for you to sit down with an experienced estate planner to make sure your plan takes into consideration potential state taxes. Some states collect estate taxes and while other states collect inheritance taxes (some actually collect both).

You may be thinking, “what the heck is the difference between an estate tax and an inheritance tax?” Well, an inheritance tax is based on who receives a deceased person’s property and how the beneficiary is related to the deceased person. An estate tax is based on the value of the deceased person’s estate and not on who gets what, according to the Memphis Daily News.

State tax laws are always changing, so it’s extremely challenging to determine tax issues far into the future. For example, Virginia actually had an estate tax in 2005 (not that long ago), and Maryland is currently undergoing a major change, adjusting their estate tax exemption levels up to match the federal level.

Keep in mind, if your deceased loved one owned property in another state that has either an inheritance tax or an estate tax (or both), then that property will may be subject to the laws of that state. Additionally, it is important to consider where your beneficiaries live, and in some cases where the administrators of your estate reside.

Because these state tax laws can change on a yearly basis, estate planning can be complex and challenging. It is important to build flexibility into your estate plan to face the ever changing state laws, and get the best tax results for you and your beneficiaries. Take the time to sit down and talk with an experienced estate planning attorney in your area to learn more about these issues and ensure your plan is up to date with the current laws.