How Does State-Level Estate Tax Work If I Don’t Live There?

Navigating estate and inheritance taxes is tricky, especially when properties span multiple states. Learn about how state-level estate tax works.



Understanding State-Level Estate Taxes

Navigating estate and inheritance taxes can be a daunting process, especially when assets and properties span multiple states. A question that often arises is: if my loved one owned property in a state with its own estate tax separate from the federal one, are we liable for that state-level tax? Let’s dive in.

The Short Answer: Yes

Regardless of where your loved one lived, if they owned property in a state with its own estate or inheritance tax, you’re generally required to pay that state-level tax. About 19 states impose their own inheritance or estate tax, independent of the federal tax.

History in Brief

Once upon a time, many states, including Texas, had their own inheritance or estate taxes. However, a legal shift around 15 years ago essentially removed this tax at the federal level. This led states like Texas to repeal their own inheritance taxes. But for several other states – like New York, Illinois, and Hawaii – these estate taxes persist. Interestingly, while one might assume a state like California would levy its own estate tax, it doesn’t!

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What This Means for Property Owners

If you own assets in these states with their own estate tax, you’ll likely be subject to it. This can bring about unexpected complications. Consider Illinois as an example: even if your estate falls below the federal estate tax exemption amount of $12.92 million – say, at $6.6 million – owning real estate in Illinois could still lead to an Illinois estate tax liability.

A Word of Caution

Estate tax provisions can differ greatly from one state to another. The measures one might take to avoid state tax in New York could be entirely different from those in Hawaii or Illinois. Thus, if you or a loved one owns assets in these states, it’s crucial to consult with a local expert to understand potential tax implications upon death.

In Conclusion

Estate planning can be intricate, especially when considering state-specific taxes. If your loved one owned assets in a state with its own tax, you’d need to settle that tax, irrespective of where they resided at the time of their death. As always, when in doubt, seek expert guidance to navigate the complexities of estate tax.

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