Where Should Estate Taxes Be Filed by State?

Estate taxes can be a significant consideration when managing an inheritance, but where they need to be filed depends on state laws. Unlike federal estate taxes, which apply nationwide, some states impose their own estate tax with varying rules and exemptions. The location of the deceased’s assets and residency status can impact tax obligations, making it important to understand state-specific requirements to avoid unexpected liabilities or penalties.

States That Have Estate Tax Requirements

As of 2024, twelve states and the District of Columbia impose an estate tax, meaning estates above a certain value must pay taxes before assets are distributed to heirs. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Each sets its own exemption thresholds and tax rates, which can significantly affect the amount owed.

Washington has the highest estate tax rate at 20%, while Oregon’s tax tops out at 16%. Illinois, Maine, and the District of Columbia have rates ranging from 12% to 16%. These taxes are separate from federal estate taxes, so estates in these states may be subject to both.

Some states have provisions that increase tax liability. Maryland is the only state with both an estate tax and an inheritance tax, meaning beneficiaries may owe additional taxes depending on their relationship to the deceased. Massachusetts and Oregon do not allow spouses to transfer unused exemptions, which can lead to higher taxes for surviving spouses if estate planning is not in place.

Differences in Exemptions and Thresholds

Exemption thresholds vary widely, leading to significant differences in tax liability. Oregon has one of the lowest exemptions at $1 million, meaning estates above this amount owe taxes. In contrast, Connecticut’s exemption is $13.61 million, aligning closely with the federal exemption. A $2 million estate in Oregon would owe taxes, while the same estate in Connecticut would not.

Some states adjust their exemptions annually for inflation, while others maintain fixed thresholds. New York adjusts its exemption each year, while Massachusetts keeps its exemption static, meaning estates that fall below the threshold one year may become taxable later if asset values rise.

New York also imposes a “cliff tax,” where exceeding the exemption by even a small amount results in taxation of the entire estate rather than just the portion above the threshold. This can create a much higher tax burden for estates that slightly exceed the limit.

Certain states offer deductions to reduce taxable estate values. Minnesota provides an additional exemption for small businesses and farms, allowing estates to exclude up to $2 million beyond the standard exemption if specific conditions are met. These deductions can help families preserve generational wealth without triggering large tax liabilities.

Domicile and Residency Impact

A person’s legal domicile at the time of death determines which state has the authority to tax their estate. Domicile is different from physical residence and is based on factors such as voter registration, driver’s license location, and state income tax filings. A person may own homes in multiple states, but their estate is generally taxed in their primary state of residence.

Some states closely scrutinize domicile claims, particularly when high-net-worth individuals relocate to states without estate taxes. New York frequently audits estates to verify whether a decedent genuinely changed domicile before death. If tax authorities determine the move was not legitimate—such as if the individual maintained strong ties to New York while claiming residency in Florida—the estate could still be subject to New York’s estate tax. Updating legal addresses, estate planning documents, and spending most of the year in the new state can help establish domicile and avoid unexpected taxation.

Certain states also apply statutory residency tests, considering the number of days an individual spends in the state each year. Minnesota and Connecticut use this approach, meaning an estate could face tax obligations in multiple states if the deceased spent significant time in more than one location. Some states offer tax credits to offset double taxation, but these provisions vary.

Multiple Property Situations

Owning real estate in multiple states can complicate estate tax obligations, as each state where property is located may impose taxes. Unlike intangible assets such as stocks or bank accounts, which are taxed based on domicile, real estate is taxed in the state where it is physically located.

Ancillary probate is often required when a deceased person owns property outside their home state, adding legal and financial burdens. For example, an individual domiciled in Illinois—where estate tax applies—who owns a vacation home in Rhode Island may need to go through probate in both states. Rhode Island could assess taxes on the out-of-state decedent’s property, leading to additional tax liabilities. Some states offer credits to offset double taxation, but these provisions vary and may not fully eliminate the financial impact.

Documentation and Filing Process

Each state with an estate tax has its own required forms, deadlines, and supporting documents. Estates typically need to provide an inventory of assets, including real estate, bank accounts, investments, businesses, and personal property. Some states require certified appraisals for high-value items such as artwork, closely held businesses, or rare collectibles.

Most states require a state-specific estate tax return, separate from the federal Form 706. New York mandates Form ET-706, while Oregon requires Form OR-706. These returns are generally due within nine months of the date of death, though some states allow extensions. Supporting documents, such as wills, trust agreements, and prior gift tax returns, may also be required. Incomplete or inaccurate filings can lead to audits, delays in asset distribution, and penalties.

Payment Obligations and Penalties

Estate tax payments are typically due within nine months of death, though some states offer installment plans or deferral options. Minnesota allows estates with closely held business interests to defer payments over 15 years if liquidity is an issue.

Late payments can result in interest charges and penalties. Massachusetts imposes a 1% per month late payment penalty, up to a maximum of 25% of the total tax due. Washington can assess penalties of up to 35% for willful tax evasion. Some states allow abatements or hardship waivers, but approval is not guaranteed. Ensuring timely and accurate payment helps avoid unnecessary financial strain and legal complications.