Death and Taxes: Do You Know What Taxes are Imposed by US States When Someone Dies?

At a glance

• The main takeaway: While most of us are aware that the US government imposes federal estate tax when an individual dies, many may not realize that multiple states may also levy taxes at the time of a taxpayer’s death.
• Impact on taxpayers: Careful pre-planning can be a critical tool in making sure that those with significant accumulated assets are able to pass down the maximum value available to their loved ones.
• Next steps: If you are looking for a Certified Financial Planner (CFP), Certified Public Accountant (CPA), or both, Aprio provides an integrated approach that coordinates financial planning, investment advisory and tax and accounting services. Our experienced CFPs, CPAs and dual-licensed advisors will collaborate with your advisors to help you maximize financial outcomes.

Are you ready to learn more? Schedule a conversation with our team.

The full story:

“In this world, nothing is certain except death and taxes,” Benjamin Franklin famously remarked. And for some Americans and their beneficiaries, a person’s death brings about its own set of taxes. It’s likely you already know that the US imposes a federal estate tax, however, some states also levy taxes when someone dies. State “death taxes,” which can include estate tax, inheritance tax, or both, are determined by the state in which a person lives or owns certain types of property, such as real estate. These taxes typically apply to larger transfers of wealth, with an exemption for smaller estates and bequests.

Below we take a deeper look into both estate and inheritance taxes.

Estate tax

At the federal level, the US government imposes a tax on estates where the fair market value of all property held by the decedent at the time of death exceeds limits set by federal law. An estate tax is a tax surcharge on your right to transfer property at the time of your death. In the federal model, all property a person owns at the time of death is accounted for at its value on the date of their death, then the total estate is decreased by remaining lifetime exclusion amounts, and tax is imposed on the resulting “taxable estate.” Under this model, the estate pays the tax at a fixed rate, maxing out at 40%, regardless of the tax rates of those receiving assets from the estate.

The lifetime exclusion amount represents the amount a taxpayer may accumulate in their estate and pass on to heirs without incurring tax. At the federal level that amount is set at $12.92 million in 2023, with increases determined annually, so taxpayers can pass down their first nearly $13 million tax-free. This amount is scheduled to revert to much lower levels after December 31, 2025, unless Congress acts to extend the enhanced exclusion amount.

Twelve states and the District of Columbia currently follow the estate tax model as a means of imposing tax on transfers arising through death. They have different exclusion levels as determined by each state:

Inheritance tax

An inheritance tax is another model used by some states to impose tax on the transfer of wealth resulting from a person’s death. In contrast to the estate tax, when a person inherits money, property, or other assets from someone who has died, the inheritance tax is levied against the person receiving the inheritance. However, in some states an estate may elect to pay the tax on behalf of the heir. The inheritance tax is based on the value of the bequest and sometimes on the recipient’s relationship to the deceased. Generally, property passing to a surviving spouse is exempt from the inheritance tax. The following states currently impose an inheritance tax:

How can you reduce the sting of death taxes?

While the top federal marginal rate on estates is 40%, and the rates in those states that impose tax on transfers at death range from 1% to 16%, taxpayers may reduce the impact of these taxes by carefully planning with a seasoned tax professional.

Those who may be subject to either a state-level estate or inheritance tax, the federal estate tax, or both, can maintain their standard of living while decreasing the amount of value held in their estate and thereby reducing the total assets subject to transfer taxes at death. This can be done through careful use of gifting to potential heirs or other individuals, donating to charitable organizations and funding trusts, all with the guidance of your tax professionals.

The bottom line

One or both of the estate and inheritance taxes could be a factor when someone dies, and they can be complicated. Because these taxes at the state level are determined by the residency of the decedent (or the location of property owned), the specifics of each situation can dramatically impact the tax bill. In addition, each state has its own tax forms, rules and deadlines.

Careful pre-planning can be a critical tool in making sure that those with significant wealth are able to pass down the maximum amount available to their loved ones. Our tax professionals at Aprio are ready to help navigate these issues, whether you are proactively planning for the future to minimize the impact of wealth transfer taxes at the time of death, or administering a current estate.

Related Resources/Assets/Aprio.com articles/pages

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Estate Tax vs. Inheritance Tax: What’s the Difference?

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