The Government Grim Reaper Wants Your Money – States With Terrifying Death Tax Laws

Cortesy of people think the estate tax is simply a creature of the federal government. Wrong. There are numerous states – 16, along with Maryland and D.C., to be exact – that impose an estate tax. Even more surprising is that some states actually impose an estate tax on estates that are valued at less than one million dollars.

At less than one million dollars, these state-enforced estate taxes will be a problem for many middle class families. If you’re frugal and have good savings practices, a middle class family has the ability to save and wind up with an estate close to one million dollars, or more. With proper planning these state estate taxes can be deferred, minimized and potentially eliminated.

The taxing authorities look at all of your assets when determining the value of your estate with some surprising valuation methods. For example, many people believe that proceeds from a life insurance policy are “tax free”. Although the proceeds of the life insurance policy are normally considered income tax free, they are not estate tax free when owned in your name. So that 1 million term life insurance policy that is worth practically nothing while you are alive causes your estate value to be increased 1 million dollars at death.

Even if you reside in a state that doesn’t have an estate tax, your estate could be hit if you own property or other assets in a state that does have an estate tax, according to I have many clients whose primary residence is Virginia (a state with no estate tax currently) but own beach property in Maryland (a state with a state estate tax). In this situation your estate could be taxed by the
Maryland authorities once you reach the 1 million exemption limit for all of your assets.

The state with the most terrifying estate tax laws is New Jersey. The Garden State imposes both an estate tax and an inheritance tax. To make matters worse, New Jersey has an exemption level that is the lowest in the country ($675,000 to be exact). If that wasn’t bad enough, New Jersey has a “look back” provision for gifts made to non-exempt individuals within three years prior to death. This means if you leave a nice car as a gift to a non-exempt individual (e.g., a niece or nephew), such a gift is subject to the inheritance tax unless the beneficiary can prove that the gift wasn’t made “in contemplation of death.”

Minnesota is another state with scary estate tax laws. The state legislature recently added a gift tax of 10 percent, with a lifetime credit of $100,000 per individual (i.e. no gift tax is owed until a beneficiary exceeds the $100K threshold). This means if you receive a gift valued at $150,000, you have to pay a 10 percent gift tax on $50,000. Also, only your spouse is exempt from the estate tax, which means your children are subject to the tax.

These estate tax laws illustrate the importance of where you reside and where your assets are located. It is important to speak with an experienced estate planning attorney in your area to ensure you and your family have the right plan in place.