Every state seems to be approaching the issue of death taxes differently, says Charles D. "Skip" Fox IV, a partner at McGuireWoods. "I don't know if you can say there are any real trends. Several states in the last couple of years have used the state death tax as a possible revenue-raiser."
For example, Delaware in 2009 reinstated its state death tax when it was trying to close a budget deficit. Illinois, he says, restored the state death tax when it raised its state income tax.
Vermont, which had a state death tax in 2009, lowered the threshold for state death taxes as part of an overall budget bill. Then, in 2010, Vermont increased the threshold-effective in 2011.
And effective January 1, 2012, Oregon replaced its inheritance tax with a stand-alone estate tax.
The good news: Overall, fewer people are subject to death taxes. "Most people who come in have no idea what state inheritance and estate taxes are," says Michael J. Garry, a Newtown, Pa.-based fee-only CFP and estate planning attorney. "They generally think the federal exemption is going up, but they don't exactly know what that means."
Garry says none of his clients has left a state fearing a steeper state death tax. But planning is important, he says. Pennsylvania, for example, has an "inheritance tax," which is very different from an estate tax, he notes. While an estate tax is generally placed on the estate transferred at death, an inheritance tax is imposed as a percentage of the value of the estate transferred to specific heirs, based on an heir's relationship to the person who dies. The highest taxes are generally assessed on transfers to more distant heirs.
In Pennsylvania, transfers to a spouse are not taxed. But there's a 4.5% tax on transfers to direct descendants and lineal heirs, a 12% tax on transfers to siblings and a 15% tax on transfers to other heirs (it excludes charitable organizations, exempt institutions and government entities). The estate pays these taxes, based on the total percentages, Garry explains.
Garry is careful to talk with clients considering a will about how the state's inheritance tax will affect them. If they're considering leaving assets to brothers or sisters who are not nearly as well off as they are, Pennsylvania's 12% inheritance tax on siblings might well impact that decision.
New Jersey, considered one of the nation's toughest states on death taxes, retains both an estate tax with a low $675,000 exclusion and an inheritance tax, Garry notes. Maryland, too, has both types.
Inheritance taxes, in the style of Pennsylvania's, were common in many states until the 1980s and 1990s. Then states found it less costly and easier to administer a simple credit or "pickup tax," based on the federal estate tax. But the Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the state death tax credit allowed against the federal estate tax between 2002 and 2005. Still, not all the states eliminated state death taxes accordingly.