“In recent years, Delaware, New Jersey and Tennessee have repealed their estate taxes and Connecticut, the District of Columbia, Hawaii, Maine, Maryland, Minnesota, New York, Rhode Island, and Vermont have made major changes to theirs. As a result, state estate tax systems are more varied than ever before. High-net-worth individuals and their advisers should take these differences seriously. This article provides an overview of the current state estate tax landscape, explains how state estate taxes impact high-net-worth individuals, discusses how high-net-worth individuals and their advisers should approach state estate taxes, and describes some of the more idiosyncratic features of today’s state estate tax systems.”

Peter Tucci provides members with commentary that examines the current state of state estate taxes.

Peter Tucci is an Associate in the Trusts & Estates Group at Milbank LLP and the Vice Chair of the Governmental Affairs and Legislation Committee of the New York State Bar Association’s Trusts and Estates Law Section.

Here is his commentary:

EXECUTIVE SUMMARY:

In recent years, Delaware, New Jersey and Tennessee have repealed their estate taxes and Connecticut, the District of Columbia, Hawaii, Maine, Maryland, Minnesota, New York, Rhode Island, and Vermont have made major changes to theirs. As a result, state estate tax systems are more varied than ever before. High-net-worth individuals and their advisers should take these differences seriously. This newsletter provides an overview of the current state estate tax landscape, explains how state estate taxes impact high-net-worth individuals, discusses how high-net-worth individuals and their advisers should approach state estate taxes, and describes some of the more idiosyncratic features of today’s state estate tax systems.

FACTS:

For decades, a federal tax credit made it possible for states to impose estate taxes at no additional cost to resident estates, and so all 50 states and the District of Columbia imposed them. Federal legislation enacted in 2001 replaced the credit with a (much less valuable) deduction. ¹ In the years since, the fundamental unpopularity of wealth transfer taxes and competition between states for wealthy residents have led many jurisdictions to repeal or substantially scale back their estate taxes. A number of jurisdictions have estate taxes that are tied to the existence of the federal tax credit, and so even though these jurisdictions’ estate taxes remain on the books, they do not have any effect. Today, just 12 states and the District of Columbia have an estate tax in effect.²

COMMENT:

State estate tax systems are more varied than ever before. This article provides an overview of the current state estate tax landscape, explains how state estate taxes impact high-net-worth individuals, discusses how high-net-worth individuals and their advisers should approach these taxes, and describes some of the more idiosyncratic features of today’s state estate tax systems.

The Basic Structure and Its Implications

Each estate tax jurisdiction (except Maryland and Vermont) imposes a graduated tax on resident estates whose values exceed a specified exclusion amount. ³ Real or tangible property owned by a nonresident decedent but located in an estate tax jurisdiction may also be subject to state estate tax. Exclusion amounts range from $1 million in Massachusetts and Oregon to $5.74 million in New York. ⁴ The most common top statutory marginal rate is 16%—a legacy of the federal tax credit, which was worth up to 16% of the value of a decedent’s taxable estate⁵—but Connecticut and Maine have top rates of just 12%, while Washington State’s top rate is 20%.⁶ In Illinois, Massachusetts, and Rhode Island, statutory rates begin at 0.8%, while in Minnesota the lowest marginal rate is 13%. Maryland and Vermont tax each dollar above their respective exclusion amounts at a flat 16% rate:

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Footnote

1 This change took effect on January 1, 2005.

2 In addition, six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. State inheritance taxes, which raise less revenue and are generally less burdensome than state estate taxes, are beyond the scope of this article.

3 In lieu of exclusion amounts, some states have “zero brackets” that subject estates with between $0 and $X to no estate tax. Since zero brackets are the functional equivalent of exclusion amounts, I use the term “exclusion amount” to describe both arrangements.

4 On January 1, 2020, Minnesota’s exclusion amount will increase to $3 million, Vermont’s will increase to $4.25 million, and Connecticut’s will increase to $5.1 million.

5 During the federal tax credit era, states set their estate tax brackets to maximize the value of the credit. As a result, the states had fairly uniform estate tax systems. Today, there is much more variation, though vestiges of the old system remain.

6 In addition, on January 1, 2020, Hawaii’s top rate will increase from 15.7% to 20%.