If you invest in real estate or own a business, where you live (and where you hold property) can make a massive difference in how much of your wealth actually transfers to your family members. Some states add their own estate or inheritance taxes on top of federal rules—and the bills can be shocking if you’re not prepared.
Below, I’ll walk through the worst states for estate planning, the best states for estate planning, and the strategies I use with clients to protect future generations from unnecessary tax liability.
Explore the full breakdown of this discussion on YouTube.
What’s the Difference Between Federal and State Estate Tax?
The federal estate tax only applies to large estates—currently around $14 million per person or $28 million for married couples. If your net worth is below that, there’s no federal estate tax.
But several states also impose their own estate or inheritance taxes. Their exemption levels are often much lower (sometimes just $1 million), and their estate tax rates can climb as high as 35%. For real estate investors and small business owners, this means your heirs may be forced to sell real estate assets or liquidate a company just to cover the state’s share.
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Which States Are the Worst for Estate Planning?
1. Washington
Exemption: $3 million
Top Estate Tax Rate: Up to 35%
Why It’s Tough: Even nonresidents can owe Washington estate tax if they own property in the state. Washington calculates the tax based on your entire estate, then applies a fraction to your in-state property. That means you could owe hundreds of thousands, even if your Washington property is worth less than the exemption.
2. Maryland
Exemption: $5 million
Taxes: 16% estate tax + 10% inheritance tax
Why It’s Tough: Maryland is the only state with both estate and inheritance taxes. If you live there and your heirs do too, the combined hit can reach 26%. Beneficiary location matters in Maryland, since inheritance tax rates depend on where family members live.
3. Oregon
Exemption: $1 million (lowest in the country)
Top Estate Tax Rate: Up to 16%
Why It’s Tough: Life insurance counts toward the taxable estate for Oregon residents. That means even modest estates—like a home, some rentals, and a policy payout—can easily trigger a tax bill of $160,000 or more. For real estate investors, Oregon is one of the worst states for estate taxes because real estate values alone can push you over the limit.
4. New York
Exemption: $7.16 million
Top Estate Tax Rate: Up to 16%
Why It’s Tough: New York has a “cliff” rule. If your estate exceeds 105% of the exemption, you lose the exemption entirely and pay tax on the full amount. Go just a little over, and you could owe a million dollars in tax.
5. Rhode Island
Exemption: $1.8 million
Top Estate Tax Rate: Up to 16%
Why It’s Tough: Rhode Island adds lifetime gifts back into your estate when calculating tax. So even if you give away assets during your life, the state may still tax them when everything is settled.
Which States Are the Best for Estate Planning?
States without their own estate or inheritance taxes are generally easier to plan in. Popular choices for investors include:
Florida – No state estate or inheritance tax; strong homestead and trust protections.
Nevada – No state estate or inheritance tax; business-friendly and trust-friendly.
Texas – No state estate or inheritance tax; straightforward rules.
Arizona – No state estate or inheritance tax; favored by many retirees.
Wyoming – No state estate or inheritance tax; flexible limited liability company (LLC) laws.
South Dakota – No state estate or inheritance tax; excellent dynasty trust options.
These states don’t eliminate the need for a living trust or irrevocable trusts, but they simplify the overall process and reduce state-level exposure.
What Should Real Estate Investors Do to Avoid Estate Tax Surprises?
Here are the strategies I use most often with clients:
Own Property Through LLCs – Using a limited liability company or land trust can convert in-state real estate assets into intangible interests, reducing state tax exposure.
Pair Entities With a Living Trust – A revocable living trust avoids probate in multiple states and streamlines transfers to family members.
Use Irrevocable Trusts Wisely – For larger estates, irrevocable trusts can help shift appreciation out of the estate, control capital gains taxes, and secure wealth for future generations.
Plan Liquidity on Purpose – Set aside cash or structure life insurance inside an entity or trust so heirs aren’t forced to sell assets.
Plan to State Quirks – Stay under New York’s cliff, coordinate gifts in Rhode Island, and watch heir residency in Maryland.
Stay Flexible – Federal thresholds can change. Building a modular plan lets you update quickly if tax laws shift.
Estate Planning Questions I Hear From Investors and Entrepreneurs
Does Estate Planning Affect Capital Gains Taxes?
Yes. While estate taxes and capital gains taxes are separate, your estate plan determines when and how basis is stepped up for real estate assets and business interests. Proper planning can reduce future tax returns for your heirs when they eventually sell properties.
Why Should Entrepreneurs and Small Business Owners Plan Early?
Small business owners often underestimate how their company will be valued. Without an estate plan, business assets can be forced into liquidation to pay estate tax rates. An estate planning attorney can help use trusts and buy-sell agreements to protect the company and employees.
Are Irrevocable Trusts Only for the Ultra-Wealthy?
No. Irrevocable trusts aren’t just for billionaires. They’re tools to remove appreciating assets from your taxable estate, provide for future generations, and even manage inheritance tax rates in high-tax states.
Do LLCs Help With Estate Planning?
Yes. Limited liability companies protect against lawsuits and creditors during life, and they also play a key role in estate planning for real estate investors. Holding rentals in LLCs simplifies transfers to heirs, keeps valuations clearer, and can even minimize state estate tax exposure.
Planning for Real Estate and Future Generations
If you own real estate assets across multiple states, your heirs could face probate in each state and overlapping estate tax regimes. That’s why I combine LLCs, land trusts, and living trusts to create one seamless plan. The goal isn’t just tax savings—it’s making sure wealth passes smoothly to future generations without unnecessary stress, taxes, or forced sales.
Bottom Line: Which States Create the Biggest Estate Planning Headaches?
The five worst states for estate planning right now are Washington, Maryland, Oregon, New York, and Rhode Island.
The best states for estate planning are those without separate estate or inheritance taxes—Florida, Nevada, Texas, Arizona, Wyoming, and South Dakota are standouts.
For real estate investors, entrepreneurs, and small business owners, the right mix of LLCs, trusts, and proactive planning makes all the difference.
Want help creating your estate plan?Schedule a free 45-minute Strategy Session with my team and get a personalized legacy blueprint that ensures your loved ones avoid probate and your assets pass on to your beneficiaries as you intended.
While you’re creating your legacy plan, make sure you don’t miss downloading your free copy of the Anderson Emergency Binder—your family’s step-by-step guide to handling your affairs. The binder includes key documents, records, and passwords–crucial resources when it matters most.
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