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Relocating for Retirement, Family or Taxes
The Impact of Location on Wealth Transfer
“Does your ability to pass on your wealth to your heirs depend on where you live ... and die? Indeed, it does.”
When the current health crisis finally passes, many people will have spent time considering what they want to do with their remaining years. That may include relocating. For some people, taxes are a real reason to move to a new state, but some states are more tax-friendly than others, says the article “Best States to Die In…For Taxes” from Tucson.com.
Estate and Inheritance Taxes Vary by State
No matter where you live, you have to pay federal estate taxes. However, there are eighteen states in the U.S. that require citizens to pay either estate taxes or inheritance taxes or both. The estate taxes are subtracted from an estate before its assets are distributed to heirs. Inheritance taxes are paid by heirs of the deceased, and it doesn’t matter if the heirs live in another state.
Understanding Estate and Inheritance Taxes
States with Inheritance Taxes
For people who live in Nebraska, immediate relatives must pay a 1% tax on inheritance amounts that are more than $40,000. In Pennsylvania, tax rates start at 4.5% for children and lineal heirs. Nebraska has the highest top inheritance tax rate of all the estates, at 18%. The others range from 10% to 16%.
Spousal Exemptions and Other Exceptions
Each state has certain exemptions, based on the amount of the inheritance and the heir’s relationship to the deceased.
Comparing Inheritance Tax Rates
If you receive an inheritance from someone who lives in one of the inheritance tax states, speak with an estate planning attorney, so that you know what tax is due.
Navigating State-Specific Exemptions and Tax Rates
Heir Categories and Exemptions
State law categorizes heirs into types for the purposes of assigning exemptions and tax rates, and these vary by state.
The Worst State for Inheritance and Estate Taxes
The worst state to die in from an inheritance tax and estate tax perspective is Maryland, which imposes a 16% tax on inheritances above $5 million for persons who died in calendar year 2019.
Until recently, New Jersey had a scaled estate tax that ranged from 0.8% to 16.0% on estates over $675,000, but the state no longer imposes any estate tax on the estate of decedents, who die on or after January 1, 2018.
Estate Planning for Tax Efficiency
Real Estate and Inheritance Taxes
Many inheritances pass through to spouses and children. The exemptions are generally fairly generous, so many people may not run into this issue with estate or inheritance taxes. However, if your estate includes a home within an expensive real estate market, your family may be in for some surprise taxes.
Consult an Estate Planning Attorney
Considering Relocation for Tax Benefits
If you are in a high tax state, relocating may not be a bad idea. Your heirs will appreciate your planning.
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