Financial advisors with wealthy clients whose estates exceed the unified tax credit of $5.49 million (for an individual) or $10.98 million for a couple shouldn’t necessarily expect those estates will have no tax liability.
Eighteen states plus the District of Columbia levy an inheritance tax, estate tax or both, but their numbers are declining, according to a new report from the conservative-leaning Tax Foundation. Delaware recently passed legislation to do away with its estate tax beginning in 2018, the same year that New Jersey ends its estate tax though its inheritance tax continues.
“Since 2005, states have been moving away from estate and inheritance taxes, a trend that is likely to continue,” Jared Walczak, Senior Policy Analyst with the Center for State Tax Policy at the Tax Foundation and author of the report.
Estate taxes are imposed on the net value of an estate, after any exclusions or credits, before there is any distribution to heirs. Inheritance taxes are paid after that distribution and paid by the beneficiaries, based on their share of the inheritance and, often, their relationship with the deceased. Transfers to spouses are exempt from both taxes.
In addition to the pending elimination of some of these taxes, several states – Maryland, Hawaii and New York — plus Washington, DC, have raised the exemption level for their estate taxes.
Up until 2005, estates received a credit for state inheritance and estate taxes paid against federal estate tax liability, but that was eliminated under provisions of the Economic Growth and Tax Relief Reconcilation Act of 2001 in a gradual phasing out.
Before 2005 many states levied a so-called “pick-up tax” on estates, which was essentially a revenue-sharing arrangement with the IRS that allowed states to collect revenues on estates larger than the federal exemption without creating their own estate tax. After 2005, some states chose not to collect any estate taxes; others chose to have their own.
“The elimination of that credit combined with the increased unified tax credit has brought to the focus of estate taxes back to where it was a century ago,” according to the Tax Foundation report.