Broker Check

Where Should You Retire? (Part II)

| December 15, 2017

It is not just about income or property taxes when it comes to the financial factors of retiring in a particular state. Last month in Part 1, we reviewed the best/worst states to retire while you are alive and in retirement. In this article, we will review state estate tax structures and further define the best/worst states for estate planning purposes.

State Estate Taxes Explained

Currently, the federal estate tax exemption (as the name implies, the amount exempt from federal estate taxes) is set at a generous $5.49 million for individuals and $10.98 million for married couples, indexed for inflation each year. Any assets over and above this exemption will be taxed based on a graduated schedule (although, it is a steep graduation, as it gets to the top rate, 40%, very quickly).

But the tax hit does not stop there, as states may levy additional taxes at the death of you and/or your spouse. There are a myriad of different state estate tax structures that may levy a) no additional taxes, b) a state estate tax above a specified exemption amount, c) an inheritance tax on specific bequests outlined in the state code (e.g., a 10% tax dollar for dollar on any assets given to anyone outside of your wife/children), or d) both an estate tax and inheritance tax. Below, we outline the best/worst states from an estate tax perspective.

State Estate Tax Havens

Which states are the most tax advantageous for estate planning purposes? This is a rather easy answer, since the majority of states in our union have neither a state estate tax nor an inheritance tax. I am going to bold many of the most popular retirement destinations so they stand out (while Alaska may not have an estate tax, retirees are not flocking there in groves):

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.

Stay Away States

While 30 states do not have any death taxes, there are many that do, and some are worse than others.

Worst of the Worst: Out east, New Jersey may be the most taxing in this respect (for now!). The state estate tax is at $2m in 2017 with rates ratcheting up from 4.8%-16%; however, NJ’s estate tax will be repealed in 2018. Jersey also has an inheritance tax on any transfers to specified heirs (generally transfers not in your direct lineage). Rhode Island has a state estate tax exemption at $1.5m with rates starting at 5.6% ratcheting up to 16%. Maryland’s has an estate tax exemption of $3 million along with an inheritance tax very similar to the one imposed in New Jersey. Massachusetts has an exemption of $1m with a top rate of 16%.

In the Midwest, the land of lakes has the most penalizing estate tax. Minnesota’s exemption kicks in at $2.1 million (rates from 5.6%-16%).

Out west, Oregon also has a $1 million exemption, but the estate tax rates begin at a painful 10% (top rate of 16%), while Washington state has an exemption of $2.12m and a top rate of a whopping 20%!

Well, Could Be Worse: These states are a step below the above in terms of the harshness of their estate taxes. Connecticut and WashingtonDC have exemptions set at $2m (Connecticut has a top rate of 12%, while DC’s top rate is 16%). Vermont has an exemption of $2.75m and a top rate of 16%. Illinois has an exemption of $4m and a top rate of 16%.

Not Too Bad: These states impose a higher threshold for the estate tax, as they mirror the federal estate tax of $5.49m (Maine, New York, Delaware and Hawaii).

Not Bad At All: This last grouping of states has no estate tax at all, but does impose an inheritance tax. Iowa will not tax your spouse, stepchildren, lineal descendants (children, grandchildren, etc.) or lineal ascendants (parents, grandparents, etc.), but will have an inheritance tax on any transfers to anyone else at a rate of 10-15%. Nebraska’s inheritance tax is variable based on counties, but can range anywhere from 1-18%. Kentucky will only tax anyone other than “Class A” beneficiaries (which consists of direct lineage, your spouse, siblings and parents) from a range of 4%-16%. Pennsylvania has an inheritance tax that ranges from 4.5% to 15%.

Now What?

A significant amount of information has been thrown your way between part 1 and part 2. Anthony and I would be happy to sit down with you and discuss any of this information with you. Your decision to retire in another state should not solely be based on financial considerations, but we feel it is important to make all decisions with your eyes wide open. Next month in Part 3, we will try to put all of this information together and note the best places to retire from both an estate planning and income tax planning perspective. If we can be of any help in the meantime, please feel free to reach out to us.

Note: In my research, I found a few great resources that I want to share. Forbes has a great map of the US where you are able to hover over any state and see the estate tax ramifications for 2017, and any sunset provisions on the horizon:

Kiplinger also has a great chart where you are able to click on any state and see all the tax laws in that particular state, including estate taxes. Please note that many of these numbers are 2016, but it should give you a good basis for understanding each state’s taxes:

Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors.

Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.