State death taxes and where they apply

Federal estate tax affects a tiny fraction of estates. State-level death taxes affect a considerably broader group, and they are much less discussed.

The two types

Estate tax is levied on the estate before distribution, based on total value.

Inheritance tax is levied on the recipient, with rates generally depending on their relationship to the deceased.

Close relatives are typically exempt or lightly taxed; siblings and more distant relatives pay more; unrelated beneficiaries pay the highest rates.

A small number of states impose an estate tax, a smaller number impose an inheritance tax, and at least one imposes both.

The number of states levying these has declined over recent decades, and several have raised thresholds or repealed them entirely.

Why they matter more than federal tax

Thresholds are frequently far lower than the federal exemption — in some states, well under half of it, and in some inheritance tax states there is no threshold at all for certain classes of beneficiary.

Which means an estate comfortably below the federal threshold, consisting of a home, retirement accounts and life insurance, can face a state liability.

Life insurance is a particular trap here, since proceeds are included in the taxable estate where the deceased owned the policy, and a policy of a few hundred thousand dollars can push an otherwise modest estate over a state threshold.

Portability at state level

An important difference.

Most states with an estate tax do not offer portability, which means a married couple cannot simply rely on the survivor using both exemptions.

Preserving both requires affirmative planning at the first death — typically a trust funded up to the state exemption amount.

This is one of the situations where a credit shelter trust remains valuable despite federal portability, and plans drafted purely around federal rules may miss it.

Which state applies

Generally the state of domicile at death, for personal property.

Real property is generally taxed by the state where it is located, regardless of domicile.

Which means someone domiciled in a state with no death tax, owning a holiday home in a state that has one, may face a liability there.

Some states also tax non-residents on tangible personal property located there.

The domicile question

Where disputes arise.

Someone who relocated in retirement but retained connections to their former state may be claimed by both.

Domicile is determined by a range of factors: where the permanent home is, where time is spent, voter registration, driving licence, vehicle registration, professional and medical relationships, club memberships, and where significant possessions are kept.

States with death taxes have an interest in asserting domicile over former residents, and audits do occur.

Anyone who has moved to change their tax position should ensure the evidence is consistent across all these factors, and should keep records from the period of transition.

Planning where a state tax applies

The techniques are broadly the same as for federal tax, applied at a lower threshold.

Lifetime gifting, noting that most states with an estate tax do not impose a separate gift tax, which can make lifetime gifts an effective way of reducing a state taxable estate.

Some states, however, include gifts made within a defined period before death.

Trust arrangements at the first death to preserve both spouses' state exemptions.

Holding life insurance in an irrevocable trust so the proceeds are outside the estate.

Considering where property is held, since real property is taxed by location.

And, for some, relocation — which should be assessed on total cost of living rather than tax alone.

Checking the position

State rules change frequently, in both directions.

Several states have raised thresholds or repealed taxes recently; others have made changes in the opposite direction.

Which means guidance more than a few years old should not be relied upon, and the position should be confirmed for the specific state at the time of planning.

This is also worth checking as part of any decision to relocate in retirement, alongside income tax and property tax.

General information only, not legal or tax advice. State rules change frequently — consult a qualified estate attorney in the relevant jurisdiction.