For decades, estate taxes were primarily a concern for the ultra-wealthy. Most families never had to worry about their inheritance being taxed because federal exemptions were high, and many states had eliminated their own estate taxes. But times are changing.

Several states are tightening estate tax rules, lowering exemption thresholds, and introducing higher rates that affect middle-class families, not just millionaires. What was once considered a problem for the wealthy is now becoming a serious issue for retirees with modest savings, homes, or life insurance policies.

Let’s look at why these 10 states are becoming brutal on estate taxes and what you can do to protect your legacy from unnecessary taxation.

Why These 10 States Are Getting Brutal on Estate Taxes

The Difference Between Estate and Inheritance Taxes

Before diving into state trends, it’s important to understand the distinction between estate and inheritance taxes.

• Estate taxes are levied on the value of the deceased’s estate before assets are distributed.

• Inheritance taxes are imposed on the individuals who inherit assets, with rates depending on their relationship to the deceased.

Some states impose one or both, meaning heirs could face double taxation. With inflation, rising property values, and increased state deficits, these taxes are becoming a way for states to raise revenue at the expense of family wealth.

Why States Are Getting Tougher

States struggling with budget deficits, rising healthcare costs, and aging populations are looking for new revenue streams. Estate taxes are seen as a politically safer option because they affect fewer voters directly and are often positioned as a tax on “wealth transfer” rather than income.

Unfortunately, many states haven’t adjusted their exemption thresholds for decades, meaning a modest home or retirement account can suddenly push an estate into taxable territory.

1. New York

New York is notorious for its “estate tax cliff.” If your estate exceeds the state exemption by just 5%, you lose the entire exemption and pay taxes on the full value. This harsh rule can create tax bills of hundreds of thousands of dollars for families with property in expensive areas like Long Island or Manhattan.

Planning Tip: Gifting strategies and careful trust planning can help keep estates under the threshold.

2. Massachusetts

Massachusetts recently adjusted its estate tax rules, but it still has one of the lowest exemption limits in the country—just $2 million. Given that property values in cities like Boston have skyrocketed, middle-class families are being caught in the tax net.

Planning Tip: Couples can use “credit shelter trusts” to double their exemptions and protect more wealth.

3. Oregon

Oregon imposes estate taxes on estates over $1 million, one of the lowest thresholds in the U.S. This means that retirees with a home, life insurance, and retirement accounts can easily cross into taxable territory.

Planning Tip: Consider lifetime gifts or moving assets into irrevocable trusts to reduce your taxable estate.

4. Washington State

Washington has one of the highest estate tax rates, with a top rate of 20%. The exemption limit is higher than Oregon’s at $2.2 million, but the steep rates make it a challenging state for estate planning.

Planning Tip: Charitable donations and gifting strategies are often used to reduce taxable estate values.

5. Minnesota

Minnesota has both an estate tax and a history of aggressive tax collection. With an exemption threshold of $3 million, even upper-middle-class families are impacted, particularly those with valuable farmland or real estate.

Planning Tip: Farm families can often use special agricultural exemptions, but these require careful documentation and planning.

6. Illinois

Illinois has a flat estate tax exemption of $4 million, with no portability between spouses. This means couples can’t combine their exemptions, which often leads to unnecessary taxation without strategic planning.

Planning Tip: Trusts and proper titling of assets can help maximize exemptions.

7. Vermont

Vermont’s estate tax exemption is currently $5 million, but the state has been hinting at tighter tax enforcement and possible future reductions to close budget gaps. For retirees with significant real estate, this can be problematic.

Planning Tip: Out-of-state relocation is increasingly common for high-net-worth Vermonters.

8. Connecticut

Connecticut is unique because it also has a gift tax, meaning you can’t simply gift your assets away to avoid estate taxes. Its exemption is $13.61 million (aligned with federal levels), but the combination of estate and gift taxes makes planning more complex.

Planning Tip: Careful annual gifting and trust structures can minimize tax exposure.

9. Maryland

Maryland is one of the few states that has both an estate tax and an inheritance tax. While the estate exemption is $5 million, the inheritance tax can hit distant relatives or non-family heirs at rates of up to 10%.

Planning Tip: Leaving assets to close family members (spouse or children) often avoids the inheritance tax, but not always—especially with blended families.

10. Hawaii

Hawaii’s estate tax exemption is $5.49 million, but high property values in places like Honolulu and Maui can push estates into taxable territory faster than expected. Additionally, Hawaii has some of the highest estate tax rates in the U.S., topping out at 20%.

Planning Tip: Lifetime gifting and property title adjustments are key tools for Hawaii residents.

The Impact on Middle-Class Families

While $1 million or $2 million may sound like a lot, retirees with paid-off homes, life insurance policies, and modest investment accounts can easily reach these thresholds, especially in high-cost states.

For example, a couple in New York with a home worth $900,000, retirement accounts totaling $1.5 million, and life insurance valued at $400,000 could find themselves facing a sizable estate tax bill, even though they don’t consider themselves wealthy.

This creates a situation where middle-class families are forced to sell property or liquidate savings just to pay estate taxes.

Key Strategies to Minimize Estate Taxes

If you live in one of these 10 states or are planning to retire there, it’s crucial to take steps early to protect your assets:

• Use trusts to control how assets are distributed and to reduce taxable estate values.

• Gift assets strategically during your lifetime to take advantage of annual gift tax exclusions.

• Consider out-of-state relocation to a state with no estate tax.

• Review life insurance policies, which can significantly increase estate values if not structured properly.

• Work with an estate planning attorney to maximize exemptions and minimize state-level taxes.

The Federal Estate Tax Factor

While this focuses on state-level taxes, federal estate taxes can also come into play for larger estates. The current federal exemption is $13.61 million (per person) for 2024, but this is set to sunset in 2026, dropping to around $6 million. This looming change means even more families could face estate taxes in the near future, making now the perfect time to plan ahead.

Do you live in one of these states? Have you experienced these higher estate taxes? Share your story in the comments!

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