Consider Susan Buffett’s estate, which closed in February. Beyond the $2.62 billion she left to charity when she died in July 2004, she also bequeathed an estate of $59 million to family and friends. Her final death tax bill? $110.4 million to federal, state and countygovernments.

How’s that? Buffett’s assets were tied up in stock in Berkshire Hathaway. The estate sold the shares to fulfill the bequests, then sold more shares to pay property taxes. Following that, the capital gains also became subject to additional taxes, for which the estate had to sell even more stock—subject, of course, to taxes.

Of the total taxes on the estate, $75.5 million went to the federal government, $29.7 million to the state of Nebraska and $5.2 million to Douglas County. In an average year, Nebraska collects roughly $20 million in inheritance taxes. Buffett’s death helped swell the 2005 total to $64.1 million. These potential windfalls spur many states to impose their own estate or inheritance taxes. The unsubtle difference between the two types of levies is that one is imposed on an estate itself, the other charged to its beneficiaries at rates that vary according to their relationship to the deceased.

"Lawmakers are addicted to the revenue," says Curtis Dubay, an economist at the Tax Foundation, a Washington, D.C., think tank. "They don’t want to see a source fall to the wayside. It’s an easy source of revenue, because you can claim it only hits the rich, so it’s politically expedient."

Across the country, state death taxes typically run from 5 percent up to 19 percent of all assets beyond the usual exemptions, generally $1 million or $2 million. The current federal estate tax sits at 45 percent through 2009, and will revert to 55 percent in 2011.

Today 27 states impose no death taxes. Taxpayers may assume that a Democratic majority in the state legislature will lead to added levies, but this assumption may be invalid. For the foreseeable future, certainly well past 2011, any state is apt to scramble to gain revenue lost since 2001, when the Economic Growth and Tax Relief Reconciliation Act began phasing out the state credit that estate-tax payers could write off on their federal returns. (This came to be known as the "pick-up tax.") The credit meant that estate-tax payers paid the federal rate and the state received a share of it. In 2005, the IRS changed the state credit into a deduction; it is scheduled to last until 2010, and revert back to a credit in 2011.

In the meantime, many states have decoupled their death taxes from federal policy so they can raise revenue independently—and they have no particular incentive to reconnect themselves to the IRS. Twenty-three states and Washington, D.C., impose some form of estate tax, including 11 states—Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Pennsylvania, Tennessee and Washington—that levy separate inheritance taxes.

TOP VIEW Choosing where to die may seem like an exercise in morbidity, but a taxpayer’s final resting place affects how much inheritance his beneficiaries will receive. Twenty-three states and Washington, D.C., impose some form of estate tax, including 11 states that levy separate inheritance taxes. Today 27 states impose neither estate nor inheritance taxes, among them some of the most popular locations in the country.

Individuals who are determined to minimize all taxes on an estate have the option of establishing residency in one of the states that not only does not levy estate taxes, but also lavishes tax incentives on the affluent. When families factor in each state’s weather and overall quality of life, five states emerge as the best ones in which to die or inherit wealth. These include, in alphabetical order:

Arizona As with the other members of this quintet, taxpayers do not have to choose between tax-friendly legislators and good weather—they can enjoy both. The Grand Canyon State is one of nine states in which all marital property is considered community property. Thus, when one spouse dies, all marital assets are subject to a 100 percent step-up on a cost basis. This frees the surviving spouse from any capital gains taxes, and subsequent heirs pay their capital gains based on the newer cost basis, which is likely to be higher than the original, thus giving them a lower tax bill. (The other states that offer this include California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

In 2010, however, Arizona will have to capitulate a bit. "With the [federal] estate tax repeal, there is a new system that would limit the basis step-up," says John Vryhof, an estate lawyer with Snell & Wilmer in Phoenix. "So what Congress gave away on the one hand, they took back with the other."

California In addition to the allure of the beach, the mountains and wine country, Californians enjoy another community-property state with no death taxes. The state also offers one law that excludes real property transfers from parent to child or child to parent from reassessment, and another that extends the exclusion to transfers from grandparents to grandchildren. In short, a taxpayer can bequeath a primary residence that has risen dramatically in value to a child or grandchild without the state assessing the house at current market value. Moreover, an individual who wishes to reduce the size of his estate by gifting a house to a child or grandchild during his lifetime can remove a highly appreciated asset from his estate for federal tax purposes, yet minimize any federal gift taxes incurred. (California also has no state gift tax.)

Florida As long as Jeb Bush lives in the governor’s mansion, the Sunshine State will tolerate no taxes on estates or income. North Palm Beach accountant Jeff Azis says that about five of his 30 clients whose net worth exceeds $10 million have relocated to this tax haven in recent years.

"I have a client with a $25 million estate who recently moved from Connecticut to Florida to avoid the estate tax," Azis says. "With estate taxes in Connecticut ranging from 8 to 16 percent depending on the size of the estate, he would have owed $3.5 million in estate taxes to Connecticut. That’s on top of the $10 million in federal estate taxes."

New Mexico Along with storied Santa Fe and Taos, New Mexico boasts the attractions of no estate tax, community property and a legislature that has gone out of its way to reduce taxes over the last four years, according to Ralph Scheuer, an estate lawyer with Scheuer, Yost & Patterson in Santa Fe. New Mexico is one of 16 states to adopt all terms of the Uniform Probate Code, so that an executor can handle an estate quickly and simply, avoiding court unless someone contests the will. (Alaska, Arizona, Colorado, Florida, Hawaii, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, North Dakota, South Carolina, South Dakota and Utah also offer this.)

Texas A person placing assets into a testamentary trust in Texas enables beneficiaries to avoid state taxes, no matter where they live. "We have a lot of folks who will move to Texas as a retirement plan," says Elizabeth Schurig, an estate lawyer with Giordani Schurig Beckett Tackett in Austin. "But even those who won’t move here might utilize Texas’ testamentary vehicles. We’ve even been doing this for U.S. citizens who live abroad, and the question is: Where do they probate their will and what do they do with their U.S. assets? One suggestion is to settle them into a Texas trust to avoid tax at death."

The Two Worst States... According to Those Who Live There
Connecticut In 2002, the Connecticut state legislature enacted an independent estate tax to serve as a stopgap measure for a budget shortfall, and made it permanent in 2005. Detractors predicted that the most well-heeled residents would flee one of the most well-heeled states. "I had a handful of clients who went through the process of changing domicile, primarily to Florida," says Paul Behling, an estate lawyer with Withers Bergman in New Haven.

"What people especially don’t like," he adds, "is that we have a cliff tax structure." In Connecticut, if an estate is worth more than the exempt amount of $2 million, the entire estate is taxed—including the first $2 million. "If you have $2 million plus one penny, the entire amount is taxed," he says, although that would be at the bottom rate of just more than 5 percent. Another source of frustration is that gifts received during a lifetime, beyond the federal exclusion of $1 million, count as part of an estate.

Yet the state with the hedge fund capital of Greenwich is still a nice place to live. According to state statistics, the number of millionaires in Connecticut increased 44 percent between 2003 and 2006.

Washington The Bill Gateses, both senior and junior, have spoken out in favor of progressive taxes that tap the rich to pay for important programs. But there is also a history of exodus since 2005, when the legislature adopted a stand-alone estate tax by narrow majorities in both houses. This followed the state Supreme Court’s decision to throw out a death tax that had been tied to the federal credit, finding it unconstitutional on the grounds that the state exemption was lower than the federal one. Shortly afterward, Services Group of America, a family business owned by Thomas J. Stewart and which was then Washington’s second-largest private company, moved to Scottsdale, Ariz. Company officials issued a statement blaming the move on the highest state inheritance tax in the nation; the top rate is 19 percent on assets of more than $9 million. Seattle developer Martin Selig provided much of the backing for a proposal to repeal the estate tax, but voters defeated it by a landslide in the November 2006 elections.

Now there is concern that history will repeat itself when the federal exemption rises to $3.5 million in 2009, while the state exemption will stay at $2 million. "I’ve had more than one client leave the state," says George Holzapfel, a principal at the law firm Lasher Holzapfel Sperry & Ebberson in Seattle. "Two have gone to Alaska, one to Idaho and one to Nevada."

Dan Weil is a freelance writer whose work has appeared in The
New York Times, the Wall Street Journal and Tennis magazine.
Jennifer O’Reilly provided additional reporting for this story.