State estate Taxes
Depending on which state you live in, you may have to pay yet another tax, a state death tax. Some states call it an estate tax, some an inheritance tax, but yet another tax it is.
Most state estate taxes are pretty much identical to federal estate taxes. The federal estate tax that you or your beneficiaries will owe will be based on the value of the estate, regardless of the relation the people have to the deceased. If you have an estate worth $700,000, before it’s all settled, the executor would write a check to the federal government to pay the estate tax; in this case the check would be for $37,000. The rest would go to the beneficiaries. In reality, it’s the estate that is responsible for paying the estate tax.
The same is true when the state gets involved. They will figure out the part of the estate that’s taxable, and the estate will have to pay the state estate tax. In most states today the state just takes its share from the federal government, which makes it fairly easy. In most states, if you pay the tax directly to the state, you can take that as a credit against your federal estate tax bill. (It won’t cost you more, in other words; it’s just an accounting
hassle.)
There are a few states left that do collect an additional state estate tax: Connecticut, Massachusetts, Missouri, New York, and Ohio. If you live in these states, check with an accountant when you’re planning your estate or expecting to inherit a lot of money. Don’t get caught unprepared.