When you're planning the ideal retirement, it's tempting to get caught up in the good stuff—like a brighter climate, a local golf course, or how many grandchildren you can fit into Christmas photographs. However, one thing might make or ruin your plans: estate and inheritance taxes.
While these taxes may not be the first thing on your mind, understanding the distinctions and possible traps may help guarantee that your money goes to the people (and causes) you care about, rather than a large tax payment. Here's what you should know to avoid unpleasant shocks.
Estate Tax vs. Inheritance Tax: A Quick Refresher
1. Estate taxis levied on the whole worth of your estate before distribution to heirs. If your estate hits or exceeds a certain threshold, the tax applies—federally, state-level, or both.
2. Inheritance tax is levied on the beneficiary of assets. Depending on the state's statutes and your connection to the heir, the tax rate may vary.
The kicker? The kind and amount of tax you pay is determined on where you live and where your heirs live.
The Federal Estate Tax: The 10,000-Foot View
Current Federal Threshold
Currently, the federal government assesses an estate tax if the value of your estate exceeds the exemption amount. The number for 2025 is expected to be roughly $13 million (adjusted annually for inflation). Only the amount that exceeds this level gets taxed.
Looking Ahead
This very large exemption is set to return to a lesser amount (about half the present level) by 2025 unless new legislation passes. Translation? If this occurs, many more estates may become liable to federal estate tax. This is why it is critical to do periodic estate planning reviews.
States That Levy an Estate Tax
Only a few states (including the District of Columbia) have an estate tax:
● Connecticut
● District of Columbia
● Hawaii.
The following states are included:
● Illinois,
● Maine,
● Maryland,
● Massachusetts,
● Minnesota,
● New York,
● Oregon,
● Rhode Island,
● Vermont,
● and Washington.
Each state establishes its own exemption levels, and some are much lower than the federal number. That means you may pay no federal estate tax but still incur a substantial charge at the state level if you reside in Massachusetts or Oregon both of which have lower thresholds. Rates typically vary from 10% to 20%, and apply to estates that exceed state-specific restrictions.
States That Impose an Inheritance Tax
Inheritance taxes are less common but still have a significant impact. These states now impose one of the following:
● Iowa (phasing out until 2025—rules change year)
● Kentucky
● Maryland is the only state having estate and inheritance taxes.
● Nebraska
● New Jersey (estate tax removed, although inheritance tax still applies)
● Pennsylvania
Typically, the tax rate is determined by your relationship to the dead. For example, children often pay a lesser rate—or no tax at all—whereas unrelated or distant relatives may pay a higher rate.
Why It Matters for Your Retirement Move
Estate and inheritance taxes may have a significant impact on your family's long-term finances. Here's why you should pay attention:
1. Avoiding state-level taxes might jeopardize your attempts to leave a generous legacy to loved ones.
2. Comprehensive Planning : When relocating to a state with no income tax, such as Florida, it's important to understand the state's estate tax rules. While Florida does not have an estate tax, it's still recommended to consult with a professional.
3. Residency Nuances : Moving to a new state requires more than just signing a lease. You must show bona fide residence; otherwise, your former state may attempt to claim your estate for tax reasons.
How to Shield Yourself (and Your Heirs) from Surprises
1.Contact Our Office : Our tax and accounting specialists can assist you in identifying your existing federal and state tax exposure and developing strategies to lower it.
2. Keep track of legislative changes , since exemptions and restrictions may quickly change. We'll keep you up to speed on developments at both the federal and state levels.
3. Consider Trusts and Other Planning Tools : Proper use of trusts, gifting methods, and insurance may reduce tax liabilities. Allow us to help you through the solutions that best meet your needs.
4. Review legal documents : Update wills, powers of attorney, and healthcare directives if moving states, particularly if you've lived in your previous state for a while.
Your Next Step
Are you ready to create the ideal retirement plan? Schedule an appointment with our office before making your big move. We'll go over your individual situation—estate worth, possible heirs, present location, and desired retirement destinations—to develop a plan that maintains more of your fortune in your family's hands.
Because, let's be honest, retirement should be about sunshine, family visits, and marking things off your bucket list, not trying to find out why half of your inheritance was taxed. Allow us to help you make the most of your hard-earned legacy.
Disclaimer
This material is provided for general educational purposes and does not represent legal, tax, or financial advice. For tailored advice, please contact our office directly. Laws vary by state and may change over time.
