Death of the Death Tax

Death of the Death Tax (Estate Tax)

Death of the Death Tax ?

When it comes to death and taxes, most of the focus in 2006 centered on Congress' battles over the federal estate tax.

Death Tax - States

But many states impose their own taxes and costs when residents die. Estates too small to trigger the federal tax can easily rack up thousands of dollars in state death taxes and probate costs. Far from being repealed if the federal tax is rescinded, this state burden is on track to rise over time.

Some states have their own estate tax systems that are independent of the federal estate tax system.

Another group of states is imposing new estate taxes to make up for revenue from the waning federal tax.

Finally, some states have expensive and lengthy probate systems that apply to an increasing number of estates.

The federal estate tax is scheduled to phase out over the next few years and disappear entirely in 2010 -- only to return in 2011 when the temporary repeal expires. Opponents of the estate tax are struggling to make repeal permanent; the House has already voted to permanently repeal it, but the bill never got to the floor of the Senate for a vote.

But many states have estate or inheritance taxes that are independent of the federal system. Those states, include: Connecticut, Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania and Tennessee. (Connecticut's tax is scheduled to disappear after 2006.)

State estate taxes, like the federal version, are assessed on the estate as a whole. But states can have different rules about who pays.

Death Tax - Breaking down the exemptions

Inheritance taxes target bequests to the beneficiaries, rather than the estate itself. Typically, beneficiaries are divided up by their relationship to the deceased, with the biggest tax breaks going to those with the closest ties. In Iowa, for example, bequests to spouses, children, parents and other direct descendents (grandchildren, great-grandchildren, etc.) or ascendants (grandparents, etc.) are exempt from the state's inheritance tax. Property destined for brothers, sisters and siblings-in-law is assessed at rates ranging from 5% to 10%, while the rate for other inheritors runs from 10% to 15%.

You can find details about state estate taxes at CCH's financial planning Web site.

In the past, most states haven't had to impose separate taxes to get a piece of their residents' estates. Instead, the states received a portion of what the estate owed the federal government. This "pickup" tax raised state coffers without the estates owing any extra. However, states are losing this boost. The federal law temporarily repealing the estate tax has already phased out the states' ability to take a portion of said tax. That cost states billions in lost revenue.

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