For the past year, estate planners were bracing families for a scheduled tax change: the federal estate tax exemption, which had been temporarily doubled under 2017 tax legislation, was set to roughly cut in half at the start of this year unless Congress acted. Congress acted. New legislation didn't just prevent that reduction, it raised the federal exemption further, to 15 million dollars per person, permanently, with future increases tied to inflation. For the overwhelming majority of American families, that's genuinely reassuring news: an estate has to be worth well into eight figures before federal estate tax becomes a concern at all.
What that federal fix didn't touch, and what most of the coverage of it left out, is that roughly a dozen states plus the District of Columbia run their own, entirely separate estate tax systems, with exemption thresholds that have nothing to do with the federal number and, in several cases, sit dramatically lower. An estate that owes zero federal estate tax under the new 15 million dollar threshold can still owe real state estate tax, sometimes substantial amounts, depending entirely on which state the deceased happened to live in.
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How Low Some of These Thresholds Actually Are
The gap between the federal number and various state numbers is larger than most people assume. Oregon's estate tax kicks in starting at just 1 million dollars, a threshold that has never been adjusted for inflation since it was set. Massachusetts starts at 2 million dollars. Washington State starts at 3 million. Other states with their own estate taxes, including Minnesota, Illinois, Maryland, Vermont, Hawaii, Maine, New York, and Rhode Island, run their own exemption levels, nearly all well below the new federal threshold. For a retired couple who owns a home that's appreciated significantly over decades of ownership, holds a typical mix of retirement accounts, and carries even a modest life insurance policy, reaching a state threshold like Oregon's million-dollar mark is entirely plausible in a way that reaching the federal 15 million dollar mark simply isn't for the vast majority of families.
The Mechanics of a Threshold That Doesn't Move
Here's the structural trap embedded in several of these state thresholds specifically: unlike the new federal exemption, which is now indexed to inflation and will rise automatically over time, states like Oregon and Massachusetts fixed their exemption amounts as flat dollar figures with no built-in adjustment. Home values, retirement account balances, and life insurance payouts all tend to grow over time, sometimes substantially, while a fixed-dollar exemption threshold stays exactly where it was set. That means a family's estate can drift into taxable territory not because of any deliberate financial decision, but simply because their home's value or their retirement savings grew over the years while the tax threshold designed to exempt "ordinary" estates never moved to keep pace. The federal fix specifically addressed this exact problem at the federal level by tying the new exemption to inflation. Several states left the identical structural flaw fully intact.
Why This Gets Missed Until It's Too Late
The practical danger here is less about the tax itself and more about the assumption gap it creates. A family that reads headlines about a permanent, generous federal estate tax exemption, correctly, understandably concludes their estate is unlikely to face any estate tax at all. If that family happens to live in one of the roughly dozen states running its own separate system, that conclusion may be entirely wrong, and the mistake typically isn't discovered by the people it affects, it's discovered by their heirs, after the fact, when a state estate tax bill arrives that nobody in the family had planned around because everyone had been reading about federal tax policy.
What Actually Protects an Estate at This Level
None of this means state estate taxes are unavoidable or that everyone needs elaborate planning, most states don't have an estate tax at all, and many families in states that do will still fall comfortably under even a lower threshold. But a permanent, generous federal estate tax exemption solves the federal half of this problem completely and says nothing whatsoever about a state-level system with its own separate, often far lower, and often un-indexed threshold running in parallel. The practical step worth taking, particularly for anyone in a state with its own estate tax and a home that's appreciated meaningfully over the years, is having an estate planning professional calculate the state-level exposure specifically, rather than assuming the federal news applies to every layer of the tax system at once.
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