States cut estate taxes to attract retirees

It’s not unusual for states to claim they are great places to live. But more and more, states are trying to get the message across that they are also great places to die.

In 2015, four states will increase the amount exempt from state estate tax, reducing or eliminating the tax heirs will have to pay. On January 1, Tennessee’s estate tax exemption will increase from $2 million to $5 million, Maryland’s exemption will increase from $1 million to $1.5 million, and the Minnesota will go from $1.2 million to $1.4 million. On April 1, 2015, the New York estate tax exemption will increase from $2.062 million to $3.125 million.

More relief is on the way. Tennessee’s estate tax will disappear in 2016. Maryland and New York will increase their thresholds each year until 2019, when they will match the federal exemption (currently $5.34 million). Minnesota’s exemption will increase in annual increments of $200,000 until it reaches $2 million in 2018.

In the past, most people didn’t have to worry about state property taxes. Federal law provided for an estate tax credit that reduced the federal tax bill by the amount paid in state estate taxes. In 2005, however, the credit was repealed, leaving large gaps between federal and state estate tax thresholds in states that still had estate taxes on the books. The 2013 law that raised the federal estate tax threshold to more than $5 million (adjusted for inflation) has ensured that the tax remains a non-issue for the vast majority taxpayers. But state property taxes remain a real threat to some family heirlooms.

Lawmakers in states that apply estate and inheritance taxes worry that wealthy retirees will vote with their feet, depriving those states of much-needed tax revenue, says Scott Grenier, certified financial planner for Baird’s private wealth management group, at Milwaukee. Taxes are one of the most common reasons retirees move to another state, Grenier says.

It is not difficult to understand why. Hawaii and Delaware have estate tax exemptions that match the federal level. But 14 states and Washington, DC, have lower thresholds, with top tax rates ranging from 12% to 19%. New Jersey’s estate tax threshold is only $675,000, which could affect heirs of relatively small estates. Seven states have an estate tax, with top rates ranging from 9.5% to 18%. Unlike an inheritance tax, which is levied on an estate before it is distributed, an inheritance tax is generally paid by the beneficiaries. Both Maryland and New Jersey have a domain and inheritance taxes.

If you live in a state that still has estate or inheritance tax and don’t want to move, talk to an estate planning professional about other tax-saving strategies. Connecticut is the only state that imposes a gift tax while you are alive, but in other states you can take advantage of gifts while you are alive to reduce the size of your estate. (Minnesota enacted a gift tax in 2013 but repealed it earlier this year.)

If you already have an estate plan, make sure it’s regularly updated to reflect revisions in your state’s law. More changes are likely as states try to make their jurisdictions more attractive to retired baby boomers. For example, legislation was introduced in New Jersey to phase out the state’s estate tax over a five-year period.

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