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Watch out for states with independent estate tax

As the United States narrowly avoided plunging from the fiscal cliff at the beginning of the year, additional estate planning provisions were instituted on a federal level to protect probate worries. Even though individuals can now hand down a whopping $5.25 million without federal taxes, state taxes still persist. These state-specific taxes could end up costing your estate thousands if you fail to anticipate their effect on your probate process. Luckily, Florida is one of three states that do not impose either inheritance or estate taxes.

During previous administrations, federal and state estate taxes were complementary; the federal tax amount would be decreased by a tax credit for the state estate tax. That credit expired in 2005, however, leaving states to create their own procedures for estate taxation. Now that the federal government is becoming more permissive, certain states are taking advantage of lower national rates to pad their own coffers.

Tax rates among states vary by significant sums. Consider the difference between New Jersey, which taxes estates worth more than $675,000, as compared to New York, which only taxes those over $1 million. Tax rates for those valuable estates can reach 16 percent. Even more surprising: States can tax your life insurance payouts at the same high rates. Experts say that those modest thresholds are likely to affect even middle-class workers.

Furthermore, some states levy inheritance taxes as well as estate taxes. In other words, the estate is taxed before it is distributed, and the heirs are taxed before they receive the payouts.

Florida is one of the most popular retirement locations because of its lenient tax structure. For those Floridians who may have moved to other states, however, estate planning becomes significantly more complicated. States are constantly updating and changing their estate tax rates, giving most people a reason to continually update their estate planning documents. Discussing strategies with an attorney that knows Florida law is always a great decision, regardless of your estate's value.

Source: Kiplinger, "Beware states with their own estate taxes," Sandra Block, May 2013

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