The old saying goes that death and taxes are the only two unavoidable occurrences in life. This is never more true for your clients than when it comes to inheritance and estate planning.
While high-net-worth clients may be focused on what they’re leaving behind for their loved ones, a common blind spot is how much of a bite the state is going to take.
Paying the tax man
For most Americans, federal estate taxes are not something they need to worry about. Federal taxes only apply to the largest of estates. In fact, as of 2014, filings are only required for estates with combined gross assets and prior taxable gifts exceeding $5,340,000.
However, depending on what state a client passes away in, their tax obligation could be quite large.
According to independent tax policy research organization The Tax Foundation, there are currently 15 states that feature an estate tax. These include: Washington, Oregon, Minnesota, Illinois, Vermont, Tennessee, New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland and Hawaii. Residents of Washington, D.C. also fall under a non-federal estate tax.
“The state with the highest maximum estate tax rate is Washington (20%), followed by 11 states which have a maximum rate of 16%,” The Tax Foundation states on its official website. “Hawaii and Delaware have the highest exemption threshold at $5,340,000 (matching the federal exemption). New Jersey has the lowest, only exempting estates up to $675,000.”
While estate taxes can be bad enough, clients may also need to think about their liability under state inheritance taxes. These can be found in seven states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee.
“Of the seven states with inheritance taxes, Nebraska has the highest maximum inheritance tax rate (18% for transfers to non-relatives); Kentucky and New Jersey follow closely behind with a top rate of 16% for non-immediate family members and all other beneficiaries,” The Tax Foundation continues.
A focus on tax planning can fall by the wayside when clients are considering their mortality, so it’s up to financial professionals to educate their clients on their rights and responsibilities.
For instance, different states will impose specific tax exemptions that can be taken advantage of. While spouses are exempt from inheritance tax in all states that feature it, domestic partners are only exempt in New Jersey and Maryland in some cases. Due dates for inheritance taxes also vary from state to state. These and other factors make proper planning essential.
Financial professionals are also in an ideal position to keep clients apprised of new changes to estate and inheritance tax laws. For instance, 2014 has seen changes to everything from annual exclusion for gifts to non-citizen spouses to foreign earned income exclusions.
Clients should be informed from the get-go on what the estate and inheritance tax rules are in their state, as well as what strategies they can employ to reduce tax burdens and accomplish wealth transfer with as little inconvenience as possible.