The Farm CPA: These States May Keep an Estate Tax

Even if upcoming tax reform eliminates the federal estate tax, many states will continue to keep an estate tax as part of their tax regime.  I happen to live in Washington state which has the highest tax rate in the country at 20% and if you are worth slightly more than $2 million, you will be hit with the estate tax.  Now, there is good news for farmers in Washington state since actively farmed property is usually exempt from the Washington State estate tax.

The following states currently have an estate tax:

•Maine, Vermont, Massachusetts, Rhode Island, Connecticut, New Jersey, Maryland, Delaware, Washington DC
•Tennessee, Illinois, Minnesota, Washington, Oregon, Hawaii

Additionally, some states have an inheritance tax for heirs receiving property.  These states are:

•New Jersey, Maryland, Pennsylvania, Kentucky, Iowa and Nebraska

Generally, if you are a resident of one of these states you are usually only taxed on real property held in that state and all of your personal property.  Real estate held in other states will be subject to their estate tax, if any.  If you move to a state without an estate tax (such as Florida, Texas or Arizona), you will still be subject to estate tax in any state where you continue to hold real property.

Some states allow you to convert real property to personal property (LLC, etc.) and this will now be exempt from estate tax in that state.  However, these rules are complex and each state varies on what is and is not allowed.

Let's look at some examples:

Farmer Jane lives in Oregon.  She is worth $4 million when she passes away.  There is no federal estate tax due since her estate is less than $5.6 million (2018 amounts) federal lifetime exemption amount.  The Oregon exemption is $1 million, therefore her heirs will owe Oregon estate tax on $3 million or about $350,000.

Same example, except during her lifetime she gives away $3 million.  There is no gift tax in Oregon, therefore, her heirs will owe no Oregon estate tax when she passes.

Same example, except she moves to Arizona and then passes away.  In this case, she will owe no Oregon estate tax unless she owned real property in Oregon.  For example, let's assume she owned $2 million of real property in Oregon.  In this case, Oregon would require her heirs to calculate the Oregon estate tax based on a $4 million value and then pay 50% of that to Oregon.  Most state's estate tax is based on the gross estate tax times the percentage held in that state.

Finally, let's assume that when she moved to Arizona that she put her farmland into an LLC.  In some cases, this will remove the value of the Oregon land from being subject to Oregon estate tax (this is an example, Oregon may not allow this).

As you can see, if you live in an state with an estate tax, it can get very complicated very quickly.  Much of the estate tax planning I deal with is for state estate taxes not federal estate taxes.  This is primarily due to the very low exemption amounts for states versus federal.