If you’re planning on transferring your wealth to the next generation, understanding the ins and outs of estate taxes in your state is absolutely crucial. 

While the federal government imposes its own estate tax, many states have their own additional taxes that can impact estates differently across the U.S. 

That’s why, today, we’re talking about how estate taxes vary and discussing the states with the highest and lowest estate tax rates. This way, you can minimize tax liabilities and ensure a smooth, easy transfer. Let’s get started. 

Key Takeaways:

• Estate Taxes Defined: Estate taxes are levies on the total value of a deceased person’s estate before distribution to heirs.
• State-Specific Variability: Estate tax laws differ by state, affecting rates, thresholds, and exemptions.
• Federal vs. State Estate Taxes: Federal estate tax only applies to large estates, while many states tax estates valued as low as $1 million.
• High Estate Tax States: States like Hawaii, Oregon, and Washington impose some of the highest estate tax rates.
• States with No Estate Tax: Florida, Texas, Arizona, Nevada, and Wisconsin have no estate tax, making them favorable for wealth transfer.
• Planning Strategies: Options like gifting, trusts, and relocation can help reduce estate tax burdens.
• Importance of Professional Guidance: Consulting a tax professional can help tailor a strategy to minimize estate tax liabilities effectively.

What are Estate Taxes? 

To break it down, estate taxes are levies imposed on the value of a deceased person’s estate before assets are distributed to heirs. 

Often referred to as a “death tax,” this tax is calculated based on the estate’s fair market value at the time of death. 

Unlike inheritance taxes, which are paid by beneficiaries on the assets they receive, estate taxes are paid directly by the estate itself.

Unfortunately, it’s quite easy to confuse estate and inheritance taxes, but they serve different purposes. 

Estate taxes are applied to the total value of a decedent’s estate before distribution, meaning they reduce the estate’s overall worth before heirs receive their portions. Inheritance taxes, on the other hand, are taxes beneficiaries pay on what they individually inherit. 

Understanding these differences is key for families like yours to make informed decisions about wealth transfer at the end of life.

Learn more in our blog: Estate Planning: Securing Your Legacy and Protecting Your Heirs. 

How Estate Taxes Vary Across States 

As we mentioned, estate taxes are going to vary depending on the state that you’re in — and this can make it a bit more complicated when it comes to estate planning. 

For those looking to pass on wealth to family members or heirs, understanding how estate taxes vary across states can make a substantial difference in how much of an estate is ultimately preserved.

So, let’s quickly talk about some of the basics of state-specific estate tax laws, as well as how federal and state estate taxes vary. 

The Basics of State-Specific Estate Tax Laws

When it comes to state-specific estate tax laws, there are some key things you should know before you start planning your wealth transfer. 

State-specific estate tax laws establish individual thresholds, rates, and exemptions that vary widely across the country. Some states levy estate taxes on estates valued as low as $1 million, while others set much higher exemption limits. 

Not to mention, the rates themselves can range from modest percentages to more significant portions, meaning that where an estate is held directly affects its tax burden. 

With each state taking its own approach to estate taxation, you must take the time to carefully consider the laws where you’re at. 

Federal vs. State Estate Taxes: Key Differences

Of course, federal and state estate taxes both serve important purposes; however, they differ in key areas. 

For example, the federal estate tax only applies to estates exceeding $12.92 million in 2023, impacting a small percentage of estates. State estate taxes, however, can apply to estates as small as $1 million in certain locations, meaning far more estates are affected by state taxes than federal. 

On top of this, federal tax rates are capped at 40%, whereas state tax rates vary widely, typically topping out around 20%. 

But, why does this matter for estate planning? Let’s talk about that next. 

Why State Laws Matter for Estate Planning

When it comes to estate planning, state laws are going to dictate the potential tax liabilities an estate may face. 

Those residing in states with high estate taxes or low exemption thresholds may need to adopt specialized strategies to minimize their tax burden. Even moving to a different state could potentially lower or eliminate estate taxes altogether, allowing for more of an estate to be preserved for future generations. 

By considering state-specific laws, you can make informed choices about your estate, ensuring that your assets are managed efficiently and that beneficiaries receive the greatest benefit possible.

States with the Highest Estate Taxes

Some states in the US have relatively high estate taxes, which can significantly impact the amount of wealth you can transfer to heirs. 

These states often have lower exemption thresholds, meaning that more estates are subject to taxes even if their total value isn’t particularly large. 

Below, we’re breaking down five states with the highest estate tax rates and what that could look like for residents there. 

Top States with High Estate Tax Rates

You will face the highest estate tax rates in the following states:

• Hawaii: Hawaii applies a progressive estate tax that can reach up to 20%, making it one of the highest in the country. Its exemption threshold is also lower than the federal exemption, meaning more estates fall within the taxable range.
• Oregon: With a top rate of 16% and an exemption threshold of $1 million, Oregon’s estate tax impacts a greater number of estates than states with higher exemption limits.
• Washington: Washington’s estate tax can go as high as 20%, with a $2.193 million exemption threshold, making it another state with a considerable tax rate on estates.
• Vermont: Vermont imposes estate taxes on estates over $5 million, with rates reaching up to 16%. While the exemption is higher than in some states, the rates remain impactful for larger estates.
• Minnesota: Minnesota applies a 13% tax rate with a $3 million exemption, meaning that even moderately sized estates may be subject to taxation in the state.

Knowing these tax rates is why it is essential to plan ahead and consult with a tax advisor — just like the professionals here at Dimov. 

States with the Lowest or No Estate Taxes 

Of course, other states in the country have extremely low estate tax rates, making them quite appealing options for those focused on preserving more of their assets for heirs. 

Whether by moving or adjusting estate planning strategies, residents of these states can benefit from reduced or no estate tax liabilities. Let’s talk about them. 

States with No Estate Tax 

Some places simply do not have estate taxes whatsoever. Those states are the following:

• Florida: Florida is a popular choice for retirees partly due to its lack of estate tax, allowing estates to pass wealth on to heirs without state-level deductions.
• Texas: Like Florida, Texas does not impose an estate tax, making it a favorable state for those concerned with minimizing taxes on inherited wealth.
• Arizona: Arizona offers estate tax relief by not imposing any estate tax, benefiting those looking to pass on wealth without additional state taxation.
• Nevada: Known for its tax-friendly policies, Nevada has no estate tax, which can be beneficial for wealth preservation in estate planning.
• Wisconsin: Wisconsin also does not levy an estate tax, providing a similar advantage for estates looking to avoid state-level taxes on asset transfers.

Low-Tax States with Minimal Estate Taxes

There are other states that, while not entirely tax-free, have relatively low estate tax rates and higher exemption thresholds, reducing the tax burden for residents compared to high-tax states. This can allow for more flexibility in estate planning and may reduce the overall tax impact on an estate.

These lower-tax states include Maryland, Massachusetts, and New York. 

At the end of the day, for those living in or considering relocating to these states, the tax savings can be substantial. Consulting with an estate planner can provide further insights into maximizing these benefits and preserving as much wealth as possible.

How to Plan for Estate Tax Liabilities by State 

So, how do you go about planning for estate tax liabilities in the first place? Let’s talk about it: 

• Review State-Specific Exemptions and Rates: Begin by understanding the estate tax threshold and rates in your state to estimate potential liabilities.
• Consider Gifting Assets Strategically: Lifetime gifts can reduce your taxable estate, as most states don’t tax gifts made while alive. Using annual exclusions and lifetime exemptions helps minimize estate tax exposure.
• Set Up Trusts for Tax Efficiency: Trusts, like revocable living trusts or irrevocable trusts, allow you to transfer assets while potentially reducing estate tax burdens in states with high tax rates.
• Explore Relocation Options: Moving to a no-estate-tax state before retirement can offer significant tax savings, especially if you plan to transfer substantial assets.
• Utilize Marital Deduction and Portability Options: In most states, assets left to a spouse aren’t taxed, and using portability provisions can further reduce estate tax on second-to-die estates.
• Work with a Tax Professional: A qualified estate planner can help you navigate state laws, utilize tax-saving strategies, and ensure compliance, especially in high-tax states. Dimov Tax Specialists and our talented team of experts are the professionals you’ve been looking for. 

Navigating Estate Taxes by State for Effective Planning

With how much estate taxes can vary from state to state, understanding how these laws impact your estate is essential for preserving wealth and minimizing tax liabilities. Whether you reside in a high-tax state or a tax-free one, proactive planning can make a substantial difference in what’s ultimately passed on to your future generations.

If you’re ready to take control of your estate planning, consulting with a tax professional is the best next step. With Dimov Tax Specialists, we pride ourselves in helping clients like you navigate complex tax landscapes across the U.S., ensuring that their estates are protected and their legacies preserved. Contact us today to start building a tax-efficient estate plan tailored to your needs.