In an article entitled “Americans Living in Canada and Canadians with US Property: You Are Subject to US Estate Tax”, we presented the US Estate Tax regime as it applies to Americans living in Canada and Canadians owning US property. Although this tax appears draconian at first, the US Estate Tax exemption amount of $11.4 million USD means that US Estate Tax exposure is currently a concern for a very limited group of individuals.
However, even if you are an American living in Canada or a Canadian owning US property and your worldwide estate’s value is below the US federal exemption amount of $11.4 million USD, you may still be subject to US tax on your US situs assets upon your death. Twelve (12) US states and the District of Columbia levy their own Estate Tax and six US States levy an Inheritance Tax, all of which operate independently from the US Estate Tax. If you own assets in any of these States such as US real estate, State estate tax and/or State inheritance tax may apply.
Although Estate Taxes and Inheritance Taxes are commonly referred to as “death taxes” since they are payable as a result of a person’s death, they are distinct in the way that they are levied. An Estate Tax is levied against the estate of a decedent whereas an Inheritance Tax is levied against the beneficiaries of an estate. The rest of this article distinguishes between these two types of State taxes and illustrates their application.
US State Estate Taxes
As in the case of the US Estate Tax, each State Estate Tax provides for a lifetime exemption amount. If the fair market value of your worldwide estate is below the exemption, you are not subject to that Estate Tax. As previously indicated, the US Estate Tax exemption amount is currently $11.4 million USD and is annually adjusted for inflation.
The States that levy their own Estate Tax do not allow for an exemption amount that is as generous as the US Estate Tax. The table below identifies the US States that levy their own Estate Tax, the applicable exemption amount, and the applicable Estate Tax rates. The District of Columbia is also included in the table because it levies its own Estate Tax.
US States with an Estate Tax in 2019
N.B. All amounts are in US dollars (USD).
| State | Exemption Amount | Tax Rates |
|---|---|---|
| Connecticut | $2,600,000 | 7.8%-12% |
| Hawaii | $5,490,000 | 10%-20% |
| Illinois | $4,000,000 | 0.8%-16% |
| Maine | $5,700,000 | 8%-12% |
| Maryland | $5,000,000 | 0.8%-16% |
| Massachusetts | $1,000,000 | 0.8%-16% |
| Minnesota | $2,700,000 | 13%-16% |
| New York | $5,740,000 | 3.06%-16% |
| Oregon | $1,000,000 | 10%-16% |
| Rhode Island | $1,561,179 | 0.8%-16% |
| Vermont | $2,750,000 | 16% |
| Washington State | $2,193,000 | 10%-20% |
| District of Columbia | $5,681,760 | 12%-16% |
We will use the following example to illustrate the combined application of the US Estate Tax and a State Estate Tax:
- George is a Canadian citizen and resident;
- He owns a property in Oregon with a fair market value of $1.2 million USD;
- George’s worldwide assets are valued at $4 million USD; and
- George’s Last Will and Testament provide that his children shall inherit his Oregon property.
Upon George’s death in 2019, he will be required to file a US Estate Tax return because his US situs assets have a value of over $60,000 USD, but his estate will not be subject to US Estate Tax because the value of his worldwide estate is below the $11.4 million USD exemption amount for this tax. However, his estate will be subject to the Oregon State Estate Tax because the fair market value of his Oregon property is above the $1 million thresholds.
If the fair market value of George’s estate exceeded the US Estate Tax exemption amount of $11.4 million USD and applicable credits, then he would be subject to both the US Estate Tax and the Oregon State estate tax. He could, however, deduct the Oregon State estate tax paid from the US Estate Tax owing.
This highlights the importance of planning not only for the US Estate Tax when owning property in the United States. Careful cross-border tax planning may allow you to minimize or avoid exposure to either or both types of the estate tax. It is also important to take into account US State Inheritance Taxes as explained in the next section.
US State Inheritance Taxes
The following table identifies the states that levy an Inheritance Tax in the column on the far left side; tax rates for each state are listed in the column on the far right. The three types of available Inheritance Tax exemptions of each state are identified in the three middle columns:
- The second column from the left: the Inheritance Tax exemption amounts;
- Third column from the left: the categories of exempt classes of beneficiaries; and
- Fourth column from the left: the categories of exempt classes of property.
US States with an Inheritance Tax in 2018
N.B. All amounts are in US dollars (USD).
| State | Exemption Amounts | Exempt Classes of Beneficiaries | Exempt Classes of Property | Tax Rates |
|---|---|---|---|---|
| Iowa | Probatable estates of less than $25,000 | Spouses, parents, grandparents, great-grandparents, children, stepchildren, grandchildren, great-grandchildren, and certain charitable donations to defined charitable, religious, educational, veterans and public organizations | Property owned in joint tenancy with persons in the previously mentioned classes | 0%-15% |
| Kentucky | Bequests of $1,000 or less to nieces, nephews, half-nieces, half-nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren
Bequests of $500 or less to non-exempt beneficiaries (see the next column) or persons not named above |
Spouses, parents, children, grandchildren, brothers and sisters | 0%-16% | |
| Maryland | Probatable estate of less than $30,000
Bequests of less than $1,000 to persons other than exempt beneficiaries (see the next column) |
Spouses, children, spouse of a child, parents, grandparents, siblings, a corporation having only certain of the aforementioned persons as stockholders, certain non-profit organizations | A primary residence that is owned by domestic partners held in joint tenancy at the time of one partner’s death; proceeds of a life insurance policy that go to a named insured | 0%-10% |
| Nebraska | Bequests of $40,000 or less to parents, grandparents, siblings, children
Bequests of less than $15,000 to uncles, aunts, nieces or nephews or the spouse of any such persons $10,000 for other transferees not listed above |
Spouses and charities | Life insurance that is payable to a living beneficiary or to a revocable living trust are exempt | 1%-18% |
| New Jersey | Bequests of $40,000 or less to parents, grandparents, siblings, children
Bequests of less than $15,000 to uncles, aunts, nieces or nephews or the spouse of any such persons $10,000 for other transferees not listed above $25,000 for siblings, the spouse, widow, or widower of a child of the decedent, and the surviving civil union partner of a child of the decedent |
Spouses, civil union partners, domestic partners, parents, grandparents, children, grandchildren and great-grandchildren | Life insurance proceeds to a designated beneficiary | 0%-16% |
| Pennsylvania | Bequests of $3,500 or less to grandparents, parents, descendants and an un-remarried spouse of a child | Spouses, children under the age of 21, charities | Property owned jointly between spouses | 0%-15% |
Since Inheritance Taxes are levied against beneficiaries of estates rather than the estates themselves, this tax is not dependent on the fair market value of a decedent’s worldwide estate. Consequently, as shown in the table above, US States that levy an Inheritance Tax do not provide for an exemption amount that is comparable in magnitude to the US federal and State Estate Tax exemption amounts. Instead, testamentary bequests may benefit from three types of Inheritance Tax exemptions:
- Exemption amounts based on (i) the value of the probatable estate or (ii) the value of bequests to a class of beneficiaries;
- Classes of exempt beneficiaries; and
- Classes of exempt property.
(I) State Inheritance Tax Exemption Amounts
- Exemption Amounts Based on the Value of the Probatable Estate
A probatable estate with a value that is less than the applicable exemption is completely exempt from the Inheritance Tax. This value is often negligible. It is calculated based on the probate rules of the State that levies the Inheritance Tax.
- Exemption Amounts for Bequests to Exempt Beneficiaries
Most US States that levy an Inheritance Tax allow for exemptions for bequests to defined classes of beneficiaries that do not exceed a certain amount. To illustrate the application of this type of exemption amount, take the following example:
- Charles is a Canadian citizen and resident.
- Charles owns a vacation home in Nebraska in his name alone.
- The vacation home has a fair market value of approximately $240,000 USD.
- Charles bequeaths the vacation home to his son, Jack, in his Last Will and Testament.
- Nebraska levies an Inheritance Tax but grants an exemption amount of up to $40,000 USD per bequest to a parent, grandparent, sibling or a child.
Upon Charles’s death, Jack can claim a $40,000 USD exemption but will be subject to the Nebraska Inheritance Tax on the portion of the fair market value of the vacation home that exceeds the exemption amount, i.e. $200,000 USD.
(II) State Inheritance Tax: Exempt Classes of Beneficiaries
Every US State that levies an Inheritance Tax makes bequests to certain classes of beneficiaries completely exempt from the Inheritance Tax regardless of the value of the inheritance. One universally shared exempt class of beneficiaries is surviving spouses. A testamentary bequest to a spouse is exempt from the Inheritance Tax regardless of the value of the bequest. However, this does not preclude the estate from being subject to the US Estate Tax and/or the applicable State Estate Tax if the estate’s value exceeds the applicable US federal and/or State Estate Tax exemption amount(s).
(III) State Inheritance Tax: Exempt Classes of Property
Some States provide that testamentary bequests of certain types of property located in the state are exempt from the Inheritance Tax. For example, in Iowa, a property that a decedent owned with his or her children as joint tenants with a right of survivorship is not subject to the Inheritance Tax. The property will be transferred to his or her children free of the Iowa Inheritance Tax.
Conclusion
Over the course of the past several years, numerous US States have repealed their State Estate Tax or have increased their Estate Tax exemption amounts to match the US federal Estate Tax exemption amount. There have been fewer changes in regards to the US States that levy an Inheritance Tax. However, this does not preclude the future repeal of US State Inheritance Taxes or a future broadening of the exemption amounts and of the categories of exempt beneficiaries and assets in relation to US State Inheritance Taxes. Recent changes at the State level and the potential repeal of the US Estate Tax mean that cross-border tax and estate planning practitioners and Canadians owning property in the United States should remain informed about future developments. If you own property in any of the US States mentioned in this article or if you may acquire such property, we recommend that you consult our team of experienced cross-border tax and estate planning lawyers for advice on the implications of owning such property.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
