The good news is that less than 1% of people are affected by the Federal Estate Tax. However, there are still states that tax estates as high as 20% (Washington) or start taxing estates at $675,000 (New Jersey). Depending on which state you are living when you die, how large your estate is, and if you have no living relatives the answer maybe everything, nothing, or somewhere in between. Since that answer is basically useless, let’s break down the different scenarios.
Scenario 1 – The government gets everything.
The Government takes everything under states laws if you have no surviving relatives and you do not have a will, or you have a will that doesn’t have a clause that covers the situation of your beneficiaries failing to survive you, then your estate will escheat to the State. Escheat is the power of a state to acquire title to property for which there is no owner. So, if you have no living relatives or valid beneficiaries when you die, the Government gets everything. The easiest way to avoid this is to create a will that includes alternate beneficiaries and a wipeout clause.
You may assume that you will have relatives that will outlive you, but to be on the safe side, creating a will that has alternate beneficiaries and a wipeout clause can keep this scenario from happening. Alternate Beneficiaries replace your first choice of a beneficiary if that beneficiary doesn’t outlive you. A Wipeout Clause is rarely needed as it only is used in case of total failure of the will. Sometimes none of the named beneficiaries in a will, their eligible heirs, or the alternate beneficiaries survive the testator. Naming a charity as an ultimate beneficiary if all other beneficiaries fail to survive, keeps the property from eschewing to the State.
Scenario 2 & 3 – The government gets nothing or something.
There are 31 states that do not impose Estate or Inheritance taxes. For people dying in the 2016 calendar year, 15 states and the District of Columbia have estate taxes and 6 states have Inheritance taxes. Maryland and New Jersey have both Estate and Inheritance taxes. Estate and inheritance taxes change frequently enough that it makes sense to revisit your will to ensure that your estate will pay the least amount of taxes allowable. For people with estates under $5.45 million in most states should be able to avoid estate and inheritance taxes, but if they move to a state that does have either of these taxes they should reevaluate their wills.
The Federal exemption for estate taxes is 2016 is $5,450,000, and double that for a married couple. The federal estate and gift tax exemptions rise with inflation, so every year the number normally increases. The 13 states with Estate taxes have different amounts, and many of them also change on a yearly basis. The laws of estate and inheritance also vary greatly as to who stands to inherit.
States with Estate taxes in 2016
- Connecticut – $2 Million Estate tax exemption
- Delaware – $5.45 Million Estate tax exemption
- District of Columbia – $1 Million Estate tax exemption
- Hawaii – $5.45 Million Estate tax exemption
- Illinois – $4 million Estate tax exemption
- Maine – $5.45 million Estate tax exemption
- Maryland – $2 million Estate tax exemption
- Massachusetts – $1 million Estate tax exemption
- Minnesota – $1.6 million Estate tax exemption (Increasing to $2 million in 2018. $5 million farm and small business exemptions)
- New Jersey – $675,000 exemption
- New York – $4.1875 million Estate tax exemption (Increases April 1, 2017)
- Oregon – $1 million Estate tax exemption (Ballot to appeal November 2016)
- Rhode Island – $1.5 million Estate tax exemption
- Vermont – $2.75 million Estate tax exemption
- Washington – $2.079 million Estate tax exemption
States with Inheritance Taxes:
- New Jersey
Your home and retirement accounts will be counted when your estate is valued for tax purposes, and proceeds from your life insurance could be counted, too. (Life insurance being exempt for taxes depends on the state and how the policy is owned and who gets the money.)To avoid taxes on your life insurance, you may want to look into creating an Irrevocable Life Insurance trust. Every state has different laws, so consulting with an attorney or estate planner is the only way you can guarantee that you are minimizing the most you are going to pay. For instance, New Jersey proceeds on a life insurance policy to a named beneficiary are not included when calculating Inheritance taxes but are included in Estate Taxes for New Jersey.
There are ways to set-up Insurance trusts for the benefit of your spouse, children, and grandchildren to avoid paying excessive taxes. With proper estate planning, it is possible to avoid paying estate or inheritance taxes to the Federal or State government.
If you want an exact number for what your estate tax would be, the formula is fairly complex based on the state that you are living in when you die, where your property is located, what is in your estate, and who stands to receive your estate. You should contact a local attorney that specializes in your state’s Trust and Estate laws to verify what you would pay.
If you have further questions, please give us a call at (973) 200-1111.
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