If you want to leave your heirs as much money as possible, you should probably die in a state with no estate tax or inheritance tax. If you can't die in a state with no estate tax or no inheritance tax, then at least die in one that has a very high estate threshold before these taxes kick in!
Although taxes are astronomically high in California, one positive is that it has no estate tax upon death. As it turns out, the majority of U.S. states do not collect an estate tax. This is good because there is already a federal estate tax that tops out at 40%.
Let's take a look at the list of states with no estate tax, also sometimes known as the death tax. We'll also look at states that have no estate tax and no income tax.
Finally, I'll highlight my top five states to have legal residence in when you die based on the combination of low taxes, natural beauty, and opportunity for your heirs. After all, you want to think about those who carry your proud name long after you're gone.
No matter where you die, it's a good idea to get an affordable term life insurance policy. This way, your beneficiaries are protected as they receive tax-free death benefits. Check out Poilcygenius to shop around for a term life insurance policy. Both my wife and I got matching 20-yera term policies during the pandemic, which provided us tremendous relief.
List Of States With No Estate Tax Or Death Tax
Here is the list of states that do not impose a state estate tax or a state inheritance tax as of 2023. The list is based off online checking with the various state tax rules. If I'm missing a state or included a state that shouldn't be there, please let me know.
- New Hampshire
- New Mexico
- North Carolina
- North Dakota
- South Carolina
- South Dakota
- West Virginia
Where Are The Best States To Retire?
Unfortunately, the most attractive state, which is missing from the list is Hawaii! Hawaii has an estate tax rate starting at 10% and tops out at 20%. At least state estate tax rates are lower than federal estate tax rates. 20% is the highest state estate tax rate for all states who do impose estate taxes.
With our definite plans to relocate to Hawaii and live out our remaining years, having to potentially pay both a federal estate tax and a state estate tax is a real downer. Too many people live in one of the worst states for work and lifestyle. I hope when they retire, they can relocate to one of the best states.
The other notable state that has an estate tax is New York. At least it has the highest exemption amount for all the estates at $6.58 million for 2023. $6.58 million is huge compared to Massachusetts and Oregon, that have exemption amounts of only $1 million.
Below is a chart that gives you an idea what the exclusion amount is by states who do have a state estate tax. Several of the 2021 exclusion amounts are higher today.
States With No Income Tax Or Estate Tax
If you want to pay the least amount of taxes, you should reside in a state that not only has no state income taxes, but also no state estate taxes as well. Estate tax is based on your legal state of residence, not where you die.
The states with this powerful tax combination of no state estate tax and no income tax are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Washington doesn't have an inheritance tax or state income tax, but it does have an estate tax.
What's the difference between an inheritance tax and an estate tax? Not much, but there is a fine difference with regards to who pays the tax.
The Difference Between An Inheritance Tax And An Estate Tax
An inheritance tax is based on the value of a specific bequest – literally each inheritance. An estate tax is based on the overall value of the deceased person's estate, all gifts made to all beneficiaries.
A decedent's estate is responsible for paying the estate tax, whereas the beneficiary is liable for the inheritance tax. Often, however, the estate will pick up the tab.
Among the states that impose inheritance taxes, most exempt immediate family members. Spouses are exempt from these taxes and some exempt the deceased's children as well. Charitable organizations that inherit are also usually exempt.
If you don't want to pay an inheritance tax, avoid inheriting anything if you reside in the following states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. The inheritance tax ranges from 0% to 18%. Check with your local state for the exact rate.
Maryland is the worst because it has an inheritance tax and an estate tax. At least the state tax exemption amount is relatively high at $5 million..
Related: Best States To Retire
The Best States To Reside In And Leave An Estate
If you plan to die very rich, it's a good idea to reside in any of the states that don't have a state estate tax. But I'd like to subjectively highlight my top five states out of all the states without a state estate tax.
- Alaska – A beautiful state that not only has no state income tax and no state estate tax, but residents also often get an annual oil tax credit. Denali National Park is wonderful. The freshwater fish are amazing to eat. The biggest bummer about Alaska, however, is the long winters.
- California – Say what you will about this expensive state, it really has it all in terms of lifestyle. You can live in the mountains, on the beach, in wine country, or in the middle of nowhere. The weather is generally great and the employment opportunities for your heirs are abundant. Finally, the University of California school system is highly ranked.
- Montana – Perhaps there is no more beautiful state than Montana. Yellow Stone National Park is amazing. If you love to hike, fish, horseback ride, and ski, Montana is the state for you. The cost of living is relatively inexpensive.
- Virginia – There are plenty of job opportunities for your heirs up in Northern Virginia, near Washington D.C. The four seasons are beautiful, although the summers can get extremely humid. The cost of living is high in Northern Virginia, but reasonable based on incomes. Virginia is also home to the greatest public university in America, The College of William & Mary, as well as some other fine schools such as the University of Virginia, James Madison University, and Virginia Tech. Virginia has a rich history.
- Wyoming – Wyoming is like Montana with all its natural beauty. The combination of no state income taxes and no state estate taxes is wonderful. Unfortunately, Jackson Hole has already become a tax-haven for the ultra-wealthy.
Most Tax-Friendly States For The Middle Class
Below is a good map from Kiplinger that highlights the least and most tax-friendly states for the middle class who won't need to worry about estate tax issues on the federal level.
Paying an estate tax is probably unlikely for most middle class Americans, except for potentially in Rhode Island, Oregon, and Massachusetts where the state exemption amount is only $1 million.
The state that stands out the most on map is Texas, labeled as not tax-friendly. This is strange given Texas has no state income tax and no state estate tax. However, Texas does have the sixth highest property tax rate in in the U.S. at 1.83%. Compared to the national average of 1.08%, Texas's property tax rate is high.
The Texas state sales and use tax rate is 6.25 percent, but local taxing jurisdictions (cities, counties, special-purpose districts and transit authorities) also may impose sales and use tax up to 2 percent for a total maximum combined rate of 8.25 percent.
The Number Of Households That Pays Estate Taxes
Below is a chart from the IRS that shows the massive number of households that pay estate taxes since the mid 1970s. Almost no household pays the estate tax (death tax) anymore, which is great!
Invest In Real Estate In Tax-Friendly States
If you're a real estate investor, it's good to pay attention to state tax laws. Now, more than ever, people will be strategically relocating to different states for a better qualify of life. More companies are allowing employees to work from home post-pandemic.
Maryland, with its estate tax and inheritance tax, will see the biggest fallout from wealthy people looking to find a higher quality of life. You can be more strategic by investing in states with no inheritance tax or estate tax through private real estate investments.
Check out platforms such as Fundrise and CrowdStreet, two of the largest and oldest real estate investment platforms today. Fundrise offers diversified funds that predominantly invest in residential and industrial properties in the Sunbelt. The Sunbelt have lower valuations and higher rental yields.
CrowdStreet is for accredited investors looking to invest in individual deals across the country. CrowdStreet screens each sponsor and deal before showing the opportunities on its platform. It's then up to you to do further screening and build your select portfolio of real estate assets in tax-friendly states.
I've personally invested $954,000 in private real estate funds and deals since 2016.
Relocating To A Tax-Friendly State Before I Die
Although I'm personally looking to relocate to Hawaii, I may have to relocate again to another state and set up residency before I die. I had never thought about having to move again until I researched the various states with estate taxes. I'm sure many of you may now be thinking the same thing.
Besides moving, the obvious way to reduce estate taxes is to know the federal and state estate tax exemption amounts and spend your assets down to the respective thresholds. Take advantage of the annual gift tax exclusion amount by giving the maximum to as many people as possible.
Estimate Your Future Wealth
Reduce your estate tax bill by running your numbers through a retirement planning calculator by Empower. This way, you get to see what your potential investment portfolio size and cash flow is in the future. Empower has the best free financial tools on the web. I've been using it since 2012 to track my net worth and calculate my retirement cash flow.
In the calculation example below, this person will only have a projected portfolio value of $6.8 million at age 90 with roughly $6,000 a month in extra cash flow.
If the federal estate tax exemption amount stays as it is, this person won't have to pay any federal estate tax. However, if this person lives in Connecticut, Maryland, Hawaii, New York, Oregon, Massachusetts, Rhode Island, Vermont, Washington, D.C., Illinois, Minnesota, and Maine, he will have to pay state estate taxes.
Please be aware that the retirement planner you choose may only take into consideration your public investment portfolios. Many estates not only have stock and bond investments, but real estate investments, private equity investments, and business equity as well.
States are always changing their tax laws, so please consult with your local accountant or estate planning attorney. Not only will some states abolish their estate tax or create a new estate tax, but some states will also change the estate threshold amount, tax rates, and beneficiary rules.
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