By Kim Gardey
A common financial planning question we are asked by our clients is whether their assets will be subject to the estate tax, otherwise known as a death tax.
For most people, the answer is no. Their assets will not be subject to a estate tax.
There are two reasons why this is so:
- Reason one: The federal estate tax applies only to individuals with assets exceeding $5,450,000 (and married couples can double that amount to $10,900,000).
- Reason two: Eighteen states and the District of Columbia have their own estate tax. However, all but one state (Pennsylvania) waive the estate tax where parents, spouses, or children inherit assets.
Thus, for most people—either because of the amount of their assets or the family relationship of the recipients—the estate tax does not apply.
Pennsylvania’s estate tax applies to immediate family members, but the estate tax rate for these individuals is only 4.5%.
Here are the states that levy their own estate tax*:
- District of Columbia
- New Jersey
- New York
- Rhode Island
State Estate Tax for Those Other Than Parents, Spouses, and Children
All of the states that tax wealth at death exempt a portion of that wealth from the tax and also vary the tax rate depending on the size of the estate and the relationship of the recipient. Exemption ranges from as little as $675,000 in New Jersey to $5,450,000 in Delaware. The tax rate varies with the size of the inheritances, ranging from as low as 0.8% to a maximum of 20% (Washington), but even this rate is still significantly lower than the federal rate of 40%.
For those individuals with higher net worth, there are strategies available for reducing the impact of estate taxes.
*Information provide is as of January 2016.