A few weeks ago, we discussed estate taxes and changes to the state exemptions with the recent passage of the Tax Cuts and Jobs Act. With the recent doubling of the federal exemption from $5.45 million to $11.2 million under the new tax law, “death” taxes at the federal level will likely impact very few individuals. In fact, a recent study by the Center on Budget and Policy Priorities (CBPP) estimates that less than 1 tenth of 1 percent, or 0.001% of estates, will be impacted by the federal estate tax in 2018. However, it is important to understand that the story is very different at the state level. In 2018, 13 states have an additional estate tax that will impact a much larger percentage of taxpayers based on each state’s various estate tax exemptions. Below, we are going to look at the final results of a study our Financial Sense® Wealth Management financial planning team recently finished conducting.
Methods
For this particular study, 2018 marginal estate tax brackets were not easily available or consistent across different sources. Since marginal tax brackets tend to not significantly change year-over-year, we used 2017 marginal estate tax rates for each state that were readily available and provided by the Tax Foundation. As previously mentioned, 13 states have their own estate tax in 2018, including:
- Connecticut
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
Recently, some states have repealed their estate tax or raised the exemption. New York plans to raise its state exemption to $11.2m for individuals after January 1st, 2019 to align with the federal estate tax exemption that was doubled as a result of the Tax Cuts and Jobs Act (TCJA). Delaware repealed its estate tax in 2017 and New Jersey phased out its estate tax which went into effect January 1st, 2018. Now, only 13 states have their own estate tax in 2018.
In addition to the marginal estate tax rates, we also looked at the change in estate tax exemptions from 2017 to 2018 for each of the 13 states below:
State | 2017 Exemption | 2018 Exemption | Change |
Connecticut | $2,000,000 | $2,600,000 | 30% |
District of Columbia | $2,000,000 | $11,200,000 | 460% |
Hawaii | $5,490,000 | $11,200,000 | 104% |
Illinois | $4,000,000 | $4,000,000 | Same |
Maine | $5,490,000 | $5,600,000 | 2% |
Maryland | $3,000,000 | $4,000,000 | 33% |
Massachusetts | $1,000,000 | $1,000,000 | Same |
Minnesota | $2,100,000 | $2,400,000 | 14% |
New York | $5,125,000 | $5,250,000 | 2% |
Oregon | $1,000,000 | $1,000,000 | Same |
Rhode Island | $1,511,560 | $1,538,000 | 2% |
Vermont | $2,750,000 | $2,750,000 | Same |
Washington | $2,129,000 | $2,193,000 | 3% |
Source: Financial Sense® Wealth Management, Tax Foundation
The final step in our research was to estimate the effective estate tax rate and tax liability for 4 various-sized estates using the 2018 exemption amounts along with the 2017 marginal estate tax rates in our calculations (see chart below).
| Connecticut Estate Tax | ||||
Total Estate | $2,000,000 | $5,000,000 | $10,000,000 | $15,000,000 |
Less: Connecticut exclusion | $2,600,000 | $2,600,000 | $2,600,000 | $2,600,000 |
Taxable Estate | -$600,000 | $2,400,000 | $7,400,000 | $12,400,000 |
Marginal Tax Rate | $2 Million | $5 Million | $10 Million | $15 Million |
7.20% | $0 | $144,000 | $115,200 | $115,200 |
7.80% | $31,200 | $39,000 | $39,000 | |
8.40% | $84,000 | $84,000 | ||
9.00% | $90,000 | $90,000 | ||
9.60% | $96,000 | $96,000 | ||
10.20% | $30,600 | $102,000 | ||
10.80% | $108,000 | |||
11.40% | $114,000 | |||
12.00% | $276,000 | |||
Total Estate Tax Liability | $0 | $175,200 | $454,800 | $1,024,200 |
Total Estate | $2,000,000 | $5,000,000 | $10,000,000 | $15,000,000 |
Effective Estate Tax Rate | 0.00% | 3.50% | 4.55% | 6.83% |
Source: Financial Sense® Wealth Management, Tax Foundation
Results
The main objective of this study was to determine which states are the worst states to die in, from an estate tax perspective. Interestingly, our results varied based on the theoretical value of the estate as shown in the graph below. For tax-unsheltered estates valued at or near $2 million at time of death, only three states would tax a percentage of the pie: Oregon, Massachusetts, and Rhode Island. According to our data for estates valued at $2 million, Oregon had the highest effective estate tax rate at 2.5% with Massachusetts and Rhode Island trailing behind at 1.8% and 0.5% respectively.
According to our data, for tax-unsheltered estates valued at $5 million and above, states like Washington, Vermont, Oregon, Massachusetts, and Rhode Island are among the worst states to die in 2018. To provide a real-world example, take an ultra-high net worth individual living in Washington who leaves behind an estate of $15 million. The total estate tax liability would be approximately $2.25 million dollars, or just over 15% of the entire estate just in state taxes!
For the sake of further argument, take Jeff Bezos and Bill Gates who are both residents of the state of Washington. Both are the world’s two richest individuals at the moment. Jeff Bezos’ net worth was recently estimated at $112B with Bill Gates not far behind at $90B. If neither of the world’s richest men did anything to shelter their estates from taxes, Jeff and Bill’s total estate tax bill would equate to approximately $22.4B and $17.99B, respectively!
Conclusion
As one famous adage goes, there are two things in life that are guaranteed: death and taxes. Estate planning isn’t just an important consideration for the Jeff Bezos’ and Bill Gates’ of the world, tax planning and estate planning are essential for individuals and retirees who want to leave a lasting legacy behind for their heirs. Estate taxes should be a factor for those who are considering whether to reside in the same state or whether to relocate to a different one during retirement. For individuals in the latter years of their lives, estate and tax planning isn’t so much about what you make, but rather about what you keep. To learn more about how estate taxes could impact you, please consult with your CPA or tax advisor.
Disclosures: This information is for general guidance only and not intended to be tax advice. For your particular tax needs and situation, please consult your tax advisor.
