What Is the Potential Impact of a State Death Tax

While the federal estate tax has a potentially substantial impact on larger estates, many estate owners fail to plan for the impact of a state death tax, even though many more estates incur a state death tax liability than are subject to the federal estate tax.

There are three categories of state death taxes:

Inheritance Tax Levied on the right of heirs to inherit property from a deceased person; imposed on and measured by the share of the estate each heir receives; varies in amount based on the heir's relationship to the deceased.

Connecticut Louisiana New Hampshire Delaware Maryland North Carolina Indiana Michigan Pennsylvania Iowa Montana South Dakota Kansas Nebraska Tennessee Kentucky

Estate Tax Imposed on the right of the deceased to transfer property to his or her heirs; levied on the value of the net taxable estate.

Massachusetts Ohio Rhode Island Mississippi Oklahoma South Carolina New York Puerto Rico

Credit EstateTax In place of an inheritance or estate tax, the state death tax is equal to the maximum state death tax credit allowable under the federal estate tax.

Alabama Idaho Oregon Alaska Illinois Texas Arizona Maine Utah Arkansas Minnesota Vermont California Missouri Virginia Colorado Nevada Washington District of Columbia New Jersey West Virginia Florida New Mexico Wisconsin Georgia North Dakota Wyoming Hawaii

Some state death tax statutes provide exemptions or special treatment for property passing to the decedent's spouse or children.

An analysis of the potential impact of your state's death tax is an important element in your estate planning. In addition, while there was a credit against federal estate taxes for death taxes paid to a state through 2004, the credit was replaced with a deduction for state death taxes beginning in 2005. Since the 2010 Tax Relief Act contains a "sunset" provision, without future Congressional action, the state death tax credit will be reinstated in 2013.