State Estate Taxes
Similar to the federal estate taxing scheme, state estate taxing schemes tax the right to transfer property. Thus, the tax is imposed on the value of the estate as a whole, and the tax must be paid by the estate. The deductions, exemptions, and credits are similar to the federal system.
State Inheritance Taxes
An inheritance taxing scheme taxes the right to receive property, not transfer it. The tax is imposed on the value of the property transferred to each beneficiary (not the value of the estate as a whole), and the tax liability is the responsibility of the person receiving the property (not the estate). The amount of the tax to be paid by each beneficiary depends on how much the beneficiary receives and the relationship of the beneficiary to you. Usually, the more closely related the beneficiary is to you, the lower the rate of tax. That is, spouses and children would be assessed a lower rate of inheritance taxes than someone who is more distantly related or not related at all.
State “Pick-Up” Estate Taxes
Many states have a “pick-up” estate tax that is designed to take advantage of the “state death tax credit” that is allowed against the federal estate tax. These states charge a state death tax that is exactly equal to the amount of the federal “state death tax credit” that is allowed as a deduction on the federal return.
Combined State Systems
Some states combine their tax systems to collect the optimal amount of tax. For example, a state may have both an inheritance tax system and a pick-up tax.
To help prepare your estate for federal and state death taxes, contact and estate planning attorney.