State Death Taxes Are the Latest Worry - WSJ.com

With the federal estate tax disappearing for most people, state death taxes have emerged as a surprise new worry.

This year, the federal exemption rose to $3.5 million per individual, or as much as $7 million per married couple. At the current level, only 5,500 estates a year are federally taxable.

That is down from the 17,500 estates that would have faced death taxes under the previous $2 million limit, the Urban-Brookings Tax Policy Center estimates.

The problem is that most states with estate or inheritance taxes haven't raised exemptions to match the federal limits. That means thousands of taxpayers who now escape the federal levy could still get hit with a state death tax.

via online.wsj.com

As the Wall Street Journal points out, the Feds don't talk with the States regarding estate tax exemptions and vice versa. States are usually left to play catch-up once the federal estate tax changes are made. The last few years have been relatively quiet; though many practitioners have been awaiting some resolution regarding the Connecticut "cliff tax" which will be going away on January 1, 2010. As of that date, if an estate is valued over the Connecticut exemption, the estate no longer get taxed all the way back to "$1 and above" but only on the amount over the exemption.

As of 2010, Connecticut should be in better shape in terms of the differences between its estate taxes and the Federal estate taxes.