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A New Paradigm: Planning for State Estate Taxes

A New Paradigm: Planning for State Estate Taxes

Not much more than a decade ago, taxpayers would flock to estate planning seminars to learn about ways to reduce or eliminate the federal estate tax. With the rise of the federal estate tax applicable exclusion amount (the amount that can pass free of estate tax) to $5,340,000 ($10,680,000 for married couples) in 2014, fewer than two out of every thousand deceased individuals will pay a federal estate tax. Many more estates, however, will be subject to a state estate or inheritance tax. For some estates that own real property or businesses in multiple states, it is possible that state estate tax may be owed to more than one state.

Each state has its own law regarding the state estate tax. Some states, such as California, have abolished the state estate tax. Many states exempt the same amount of property as the federal government. In those states, no state estate tax would be owed unless a federal estate tax is owed. Other states have set their exemption limits lower than the federal government, requiring a payment of state estate tax when no federal estate tax is owed. In some circumstances, a state estate tax is owed at the death of the first spouse to die. Due to the unlimited marital deduction, federal estate tax is almost never due until the surviving spouse dies.

Following is a chart showing those states that impose a state estate tax and the amount that may pass state estate tax free in those states:

State2014 State Exemption Amount
District of Columbia$1,000,000
New Jersey$   675,000
New York$1,000,000
Rhode Island$   921,655

For unmarried individuals who reside in or have real property located in these states, special estate planning will be needed. The planning will usually involve some type of planning to gift a portion of the estate prior to death or using strategies to reduce the size of the taxable estate.

For married couples, the planning would likely involve the use of a tax-sensitive Will or revocable living trust that will divide into two or more shares upon the death of the first spouse. One share would contain the amount that can be passed free of state estate tax by the deceased spouse. One or more other shares would contain the surviving spouse’s portion of the estate as well as the balance of the first deceased spouse’s estate over the amount that can be passed state estate tax free. As with unmarried individuals, planning can also involve lifetime gifting as well as strategies to reduce the size of the taxable estate. Some states provide for an unlimited marital deduction (like the federal government), while other states have no laws to postpone state estate taxation at the death of the first spouse.

A client relocating from a state that has no estate tax or one that follows the federal rules to a state that has a lower state estate tax exemption amount should have his, her, or their estate plan reviewed to determine if planning is needed to reduce or eliminate the state estate tax in the new state of residence. A client moving from a state with an estate tax to one with no estate tax or with a higher estate tax limit may be able to have his, her, or their estate plan simplified. Clients who reside or have property in multiple states need to have their estate plans reviewed to determine estate tax treatment in each state of residence or where real property and businesses are located.

Our law firm focuses on estate planning and administration for clients of all levels of wealth. We also offer trust administration and probate services. We can assist clients in determining whether they may be liable for state estate or inheritance tax in one or more states. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding tax developments as well as cutting edge planning strategies for persons of all wealth levels. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.

According to the Tax Policy Center, only 0.14% of estates will pay federal estate taxes.

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