State inheritance taxes: What do you need to know?

Prior to 2001 legislation, states received a portion of the federal estate taxes paid.  This provision was phased out by 2005 and, as a result, many states have or are considering imposing estate taxes on the estate of the deceased.

In addition, some states impose a state inheritance tax on beneficiaries who inherit property.  If any of your beneficiaries live in one of these states, they must report the amount of their inheritance as income when they file their state tax return.  (Don’t plan on dying in a state with an inheritance tax.  It will increase your tax bill.)

You have the right to provide in your will or your trust that any inheritance taxes will be paid from the estate before the estate is distributed to your beneficiaries.

  • States may have special rules when spouses and children inherit property; the inheritance tax rate is often lower than the tax rate applied to other beneficiaries.  Many states do not collect inheritance taxes from spouses or children.
  • If you own real estate in another state, your estate may need to file and pay an estate or inheritance tax in that state.
  • In some states the executor may be required to obtain an inheritance tax waiver from the state tax authorities before the assets in the deceased’s probate accounts may be released.

States are continuing to change their estate and inheritance tax rules.  We recommend that you talk with a professional advisor to understand the status of estate and inheritance taxes in your state if you believe the value of your estate will be subject to a state estate or inheritance tax.

Fact: The following states have some type of an estate or inheritance tax:

  • Estate Taxes: Connecticut, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, Washington, Wisconsin and the District of Columbia.
  • Inheritance Taxes: Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee