An estate tax is a tax on your estates, or everything comprising your net worth, after you pass. Estate tax accounts for everything you own or have certain interests in at the date of your death by using the fair market value of each item, rather than what the deceased paid for the assets. Your property may include cash, real estate, insurance, trusts, business assets, annuities, financial securities, and other assets.
The value must exceed an exclusion limit set by law and only the amount that exceeds that threshold is subject to estate tax. The estate tax does not apply to assets that will be transferred to a surviving spouse, but when that spouse who inherited the estate dies, the beneficiaries may be subject to the tax.
It is important to note that an estate tax is applied to an estate before the assets are given to beneficiaries. An inheritance tax applies to assets after they have been inherited and are paid by the inheritor. There is no federal inheritance tax. As of 2023, Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have their own inheritance tax. Inheritance tax is only applied if the amount is above each state’s threshold and is assessed on the amount that exceeds that threshold. Inheritance tax rates typically begin in the single digits and rise to a max of anywhere between 10% and 18%.
There are both federal estate taxes and state estate taxes. The Internal Revenue Service (IRS) requires estates to exceed $11.4 million to file a federal estate tax return and pay estate tax. Because the tax being assessed is only on the portion of the estate that exceeds the exclusion limit, the effective U.S. estate tax rate is substantially lower than the top federal rate of 40% in many instances.
An estate that is not subject to the federal estate tax may still be subject to state estate taxes. This is because state exemptions are significantly lower than the federal exclusion. All exemptions are less than half of the federal. However, estates valued at less than $1,000,000 are not taxed in any jurisdiction.
Estate tax rates are typically assessed in brackets after the exemption threshold like income tax is assessed. The tax rate, as of 2023, typically starts at 10% and then increases in steps up to about 16%. Tax rates can be above and below these numbers. The maximum estate tax rates in Maine and the District of Columbia are the lowest at 12%. The maximum rates are the highest in Washington and Hawaii, where they go as high as 20%.
The twelve states that levy state estate tax are Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
The states with no state estate tax as of mid-2023, are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.
