The ways in which the cost of living differs between neighborhoods, cities, and states is a relatively well known phenomenon. According to a family budget calculator by the Economic Policy Institute, [a nonprofit, nonpartisan think tank] for a family of four to live comfortably in the metro-Pittsburgh area, take home income should be a bit less than $67,000 per year. For that family to maintain the same quality of life in metro-Chicago, that number jumps to nearly $72,000 and if that family were to move to the Bay Area, a take home income of less than $92,000 per year would necessitate sacrifices. While disparities among the cost of living throughout the country are clear, what about the inequities for the cost of dying? More specifically, how familiar are you with the death tax consequences of dying in one state versus another?
There's a saying that the only two guarantees in life are death and taxes, so it should come as no surprise that the latter can closely follow the former. Federally, each American is granted a $5.49 million lifetime federal estate tax exemption and married couples can combine their benefit for a total of $10.98 million. Since fewer than 1% of Americans reported assets in excess of either threshold in a 2013 census report, concern over the 40% federal estate tax bite, for assets above either amount, should be rare. Unfortunately, Federal and State governments are two separate beasts. Therefore, while most Americans need not worry about the federal estate tax implications of their death, many Americans should think about the estate tax implications of their death in the state where they reside.
Imagine the state government in your state of residence as your landlord. You pay taxes to your landlord in exchange for a host of amenities and it's to the landlord's benefit to attract as many "renters" as possible, because that spells more rental income in the form of taxes. States tailor their tax policies to appeal to a variety of groups, businesses and individuals alike, in an effort to cultivate the demographics most beneficial for the state. So, since someone told state governments about the two inevitabilities in life, many are fervently working to make it economically beneficial for residents to die with a legal address on their soil.
There are 18 states with an estate and/or inheritance tax and Pennsylvania is one of them. With an inheritance tax of 4.5% for transfers to direct descendants, 12% to siblings, and 15% to other heirs, PA is among the most reasonable. New Jersey, by comparison, has a 16% inheritance tax, coupled with a 16% estate tax paired with a $2 million exemption. Does this mean you should avoid these 18 states entirely, because death could be just around the corner? No, of course not. These tax consequences should be considered as one element in the planning of major life decisions, like retirement. For example, does it make sense to move from Delaware to Florida, since Florida doesn't have any death taxes? Maybe, because Delaware does have a 16% estate tax, but it also has a $5.49 million exemption. Conversely, Delaware has no sales tax, while Florida charges 6%. So, will the trade off be worth it?
The cost of dying in particular states is important because it is a factor that generally goes unnoticed until the most trying times. By no means do we feel state inheritance and/or estate taxes should be the driving force behind a residency decision, but if your financial planning involves not moving again, these taxes should be one of the factors you consider.
Since the cost of dying in one state versus another is just one of many planning criteria, we want to hear about what you're planning for. Tell us about your goals at the link below and we might be able to address one of them in an upcoming WMS Quarterly Insight.
Kestra IS and Kestra AS do not provide legal or tax advice. Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.