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The State of State Estate Taxes


Most people know that there is a federal estate tax (the dreaded “death tax”). But many are surprised to learn that some states (including Illinois) also have a separate (and additional) state estate tax. The federal estate tax calculation previously allowed a credit for state estate taxes paid, which generally negated the impact of state estate tax. Instead, the federal law now only allows a deduction for state estate taxes paid. I’ll spare readers the math lesson, but suffice it to say that the difference between a credit and a deduction is…a lot of tax.

For 2014, the federal estate tax exemption is $5,340,000 per person. The exemption will increase annually for inflation (the 2015 expected exemption is $5,430,000) and unused federal exemption is now portable between spouses. However, the Illinois estate tax exemption is fixed at $4,000,000, is not indexed for inflation (or scheduled to increase) and is not portable between spouses. For those with assets at or near these levels, this mismatch between the federal and state exemptions requires careful planning.

It’s also worth keeping an eye on other states’ estate tax laws. Why should an Illinois resident care? Aside from dazzling acquaintances with your death tax knowledge at cocktail parties — at least 3 possible reasons:

  • If you’re planning or considering a move to another state, now or in the future; or
  • If you own real estate in another state or states; or
  • If you have a beneficiary that lives in another state that has estate or inheritance tax

But state estate tax laws change frequently and can be difficult to track and compare. Here are 3 good resources to stay on top of this:

1. The law firm of McGuire Woods LLP publishes a detailed State Death Tax Chart, which is updated regularly (last revision date June 1, 2014).
2. The Money website provides a nice overview as well as a list of the state legislative changes made over the past several years.
3. Forbes annually publishes a not-so-subtly titled “Where Not To Die In (Year)” article (see “Where Not To Die in 2015” by Ashlea Ebeling).

If you don’t want to scan through the chart, here’s a quick (but not detailed) summary:

  • States with estate tax only: Connecticut, Delaware, D.C., Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington
  • States with inheritance tax only: Iowa, Kentucky, Nebraska, Pennsylvania and Tennessee
  • States with both estate and inheritance tax: Maryland and New Jersey

What state has the lowest exemption? That would be New Jersey, at $675,000.

For its part, Illinois is the only state at $4 million, which is the highest separate state estate tax exemption that is not tied to the federal exemption. Why $4 million? I’ve not a clue — ask your state legislators.

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