Thanks to the fiscal cliff tax deal (the American Taxpayer Relief Act), the federal estate tax exemption of a generous $5 million per person, indexed for inflation, is now permanent. So for 2013, up to $5.25 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any excess over the exemption amount.
By contrast, states with estate taxes typically exempt $1 million or less per estate from their tax and impose a top rate of 16%. New York, for example, sets its exemption at $1 million. So the estate of a person dying in New York with $5.25 million would owe no federal tax, but would owe New York $420,800, calculates Donald Hamburg, an estate lawyer with Golenbock Eisenman in New York City.
Six states levy only an inheritance tax, with the rate depending on the relationship of the heir to the deceased and the taxes kicking in, in some cases, on the first dollar of bequest. Two states, Maryland and New Jersey, impose both. Maryland, for example, imposes an estate tax of up to 16% above a $1 million exemption, and a 10% inheritance tax on every dollar left to a niece, nephew, friend or partner, but no inheritance tax on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.) As in the federal system, bequests to a spouse are tax-free.