Question: My wife and I enjoy your excellent column which appears in our local paper in Pennsylvania. You said in a recent column that 98% of those who die will not have taxable estates, but this statement seems not to apply to those of us who live in places like Pennsylvania -- that is, in states that impose cruel and significant inheritance taxes.

In our state, the surviving spouse is the only person exempt from this tax, which begins taking out a bite with the first dollar. As I understand it, a child or parent who inherits gets hit with a tax of 4.5% of all assets inherited, while a beneficiary who is not related to the decedent will pay a whopping 15% tax.

I think Pennsylvania is the worst of the relatively few states that levy inheritance taxes. Thank you for all that you do to provide excellent information to your readers.

Answer: Thank you for your e-mail. The column about which you speak dealt only with federal estate taxes, not state inheritance taxes, which we believe should be addressed.

Based on our research, there appear to be ten states where inheritance taxes are still a factor to be reckoned with: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. As far as we can tell, all states that levy inheritance taxes let spouses off of the hook, and some do not tax testamentary dispositions to children and other close relatives.

In other words, each state with an inheritance tax on the books has its own unique way of assessing the tax which, unlike the federal estate tax that is imposed on the total estate after a “deductible” is charged on the part of the estate received by a beneficiary and paid by the person who receives inherited property.
In our view, however, inheritance taxes are only part of the problem because “traditional inheritance laws” that were designed around the then-prototypical “Mom, Dad, and Children” definition of family are failing to meet the needs of the “family” which, over time, has morphed into many different types of relationships.

Examples include single- parent families with and without non-marital children; unmarried cohabitants with or without children; stepparents with two or more sets of children; proxy parents, such as grandparents who raise grandchildren as their own; and even children who are born through artificial insemination or via surrogate mothers. Clearly, without special planning today, death in some of these relationships will meet neither the needs of the survivors nor the wishes of the decedent.

Another issue that plagues American inheritance laws today is our mobile population juxtaposed against inheritance laws that vary significantly from state to state. While the Uniform Probate Code has been passed in a growing number of states, each state legislature tinkers with parts of the Act, making it not “uniform,” after all.
And, to complicate matters further, the potential of births occurring long after a parent’s death via frozen embryos and sperm must be addressed because such situations could postpone distributions from an estate for years.

Taking the NextStep: While inheritance taxes are different from state estate taxes, retirees considering a state in which to retire should look at all taxes levied, not just inheritance taxes. For more information about taxation and the retiree, click here