Only two states – Maryland and New Jersey – impose an inheritance tax as well as an estate tax on top of the Federal estate tax. Many states are eliminating or have eliminated death taxes altogether. But only these two impose both additional state level death taxes on top of the federal tax.
Recently, Maryland signed into law legislation that gradually brings the state estate tax in line with the federal tax. Presently, estates that are valued below $5.34 million dollars are exempt from Federal estate tax. So only estates worth more than that have to pay a tax. In Maryland, the exemption is now being raised from $1M to a projected $5.9M in 2019 – which is the current federal exemption indexed for inflation.
Impact of an Inheritance Tax
But there is still that pesky additional inheritance tax. Depending on who you leave your money to, they may be required to pay 10% of that inheritance as a state tax. There are exemptions. Essentially blood (or adopted) relatives and their spouses are exempt from the inheritance tax. So leaving money to your spouse, parents, siblings, children, grandkids and all of their spouses will not trigger the inheritance tax. But, if you want to leave something to a favorite aunt or uncle, niece or nephew, cousin, or best friend from high school, you will have to tax into account that they (or your personal representative) will have to pay that 10% before any funds are distributed.
So is that a big deal? A recent study estimated that Maryland lost $5B (as in billion) in personal income tax collections in the previous decade in part because folks have moved out of state to avoid Maryland's high tax – including the double whammy of estate and inheritance taxes. The same is true in New Jersey – the other state with an inheritance tax. A survey done by Fairleigh Dickerson University cited that 57% of New Jersey residents polled said they plan to leave the state when they retire because affordability and high taxes make retiring in NJ difficult.
Planning Around an Inheritance Tax
Then what are we to do when it comes to proper estate planning. Keeping up with the law is a good start. Urging our representatives to repeal the inheritance tax is a logical next step. And simply understanding the ramifications of how and to whom you leave money in your estate plan is the kind of critical evaluation that an estate planning attorney can provide.
Of course, we could all move. The tropics sound nice!