Best States to Die In (but it’s not a good year to do it anywhere)

March 15, 2010 — Notes: First,this article was prompted by an excellent suggestion from one of our visitors, Gerry. Second, it is really about the worst states to die in, but we didn’t want to have a negative headline. It will be easy for you to figure out the best states to die in – they are the ones NOT mentioned in this article.

It’s not the cheeriest topic, but what critics call the “death tax” is on the minds of many people. The Economic Growth and Tax Relief Reconciliation Act of 2001 set up lower estate tax rates and higher exemptions through 2009, and then repealed the estate tax in 2010. Now that we are in 2010, the federal estate tax laws are in a murky state. If Congress doesn’t act, people who die in 2010 might not have to pay any estate tax, unless a law is passed this year or retroactively in the future. With no congressional action 2011 will be a worse year to die, since the exemption will revert from $3.5 million to what it was in 2002 ($1 million) and the tax rate will climb back to what is was in 2001 (55%).

Most experts expected that by now the Congress would have enacted a law specifying what the estate exemption would be. Thanks to the ongoing health care log jam, it appears that Congress is miles away from taking up other business.

A complex subject
Let’s start by saying that estate and inheritance taxes are a complex subject, one where you should have a competent professional helping you. If your estate is worth less than $1 million, at least you don’t have to worry about that problem – your estate will not be taxed under current laws. Some definitions – an “estate tax” is levied on the net value of what you are worth when you die, an “inheritance tax” is levied on your heirs from what what they collect from the estate. The estate tax is more common. Your spouse will not pay inheritance taxes from your estate, but your children and other heirs might in some states.

State laws change quickly so it is important, particularly if your estate will be large, to look into your state’s laws carefully. One of the further complications relates back to the federal exemption problem we discussed above. Many states had their estate taxes pegged to the federal law. But faced with the prospect of declining revenues, many have since “decoupled” their laws from the federal, allowing them to ignore the federal exemptions that steadily climbed through 2009. Other states have changed their laws so they can set their estate and inheritance taxes and exemptions independently. According to an article about state estate taxes at About.com, 14 states and the District of Columbia collect estate taxes in 2010:

Connecticut
Delaware
District of Columbia
Maine
Maryland
Massachusetts
Minnesota
New Jersey
New York
Ohio
Oregon
Rhode Island
Tennessee
Vermont
Washington

Inheritance Taxes
There are currently 7 states that collect inheritance taxes (Maryland and New Jersey levy both estate and inheritance taxes!):

Indiana
Iowa
Kentucky
Nebraska
Maryland
New Jersey
Pennsylvania

What does all this mean to you?
If your estate will be worth more than $1 million and you are very concerned about these taxes you might consider moving to one of the states not listed above. A state without an income or inheritance tax will let more of your hard-earned money reach your heirs. However, as one savvy estate attorney advised us, choosing a place to live based on tax policy is a case of the tail wagging the dog. Better to choose the place you want to live in first, then if all things are equal, you could tilt to the low-tax state. Of course, before you make any decisions you should consult a competent estate attorney and/or accountant.

The other issue arising from this discussion points out the dis-functionality of our Congress in 2010. We rely on the government to set laws so that we can follow them. But this year millions of citizens have no idea what the estate laws will be this year or next. As a result they are having to make complex decisions that involve significant dollars without knowing the law. Some experts predict that Congress will pass exemptions similar to what they were in 2009 ($3.5 million), with a worse case prediction of a $1 million exemption (The House has passed a bill with the $3.5 exemption, but the Senate has not acted). Some predict that the eventual law will be retroactive, covering estates of people who died in 2010. If a law is passed reinstating the estate tax with a $1 million exemption and a 55% tax rate, 2010 could be a very bad year to die for people whose estates are worth more than $1 million. Take this overly simplistic and hypothetical example to see why: You die in 2010 and your estate has a net worth of $3 million. Subtract your $1 mill. exemption, so $2 million is taxable. If the tax rate is 55%, $1,100,000 will be paid in federal taxes by your estate, plus any applicable state estate and/or inheritance taxes. For a more detailed discussion see the AARP Estate Tax Calculator.

For further reference:
7 States to Avoid
Most Tax-Friendly States
What do you think?
Please use the comments section below to give us your input on this subject.