In an effort to balance the state budget, Delaware has enacted an estate tax for decedents dying on or after July 1, 2009 and having an estate value greater than $3,500,000. The Delaware estate tax is tied to the federal estate tax exemption and starts at 10.4 percent for estates over $3,500,000, increasing to 16 percent on the largest estates. The new Delaware estate tax will expire after four years, on July 1, 2013.

The law applies to Delaware residents as well as non-residents who own real estate or tangible personal property in Delaware, with non-resident estates taxed on the fraction representing Delaware assets. Land enrolled in agricultural preservation programs is exempt. Estate tax returns are due nine months after death, making the first Delaware returns due on April 1, 2010.

Because of the interaction between state and federal law, the new Delaware estate tax imposes a greater burden on large estates than Delaware’s previous estate tax, which was phased out in 2005. Prior federal law gave estates a credit for state death tax, but current federal law only gives a limited deduction for state estate tax.

With the Delaware tax linked to the federal estate tax credit, it has a similarly uncertain future. Without a change in federal law, the federal estate tax will be repealed for the year 2010, and in 2011 the federal exemption will be reduced to $1,000,000 per person.

The Delaware General Assembly chose to resurrect Delaware’s estate tax but not its inheritance tax, which was repealed in 1999. An inheritance tax is a tax assessed based on the relationship between the decedent and the heir who is inheriting the property. Many of our neighboring states, including Maryland, Pennsylvania and New Jersey, have either an estate tax, an inheritance tax, or both.

There was little advance notice that the Delaware legislation was pending. The bill was passed by the House on June 29, by the Senate on June 30, and enacted by signature of Gov. Jack Markell on July 1, 2009.