All the recent publicity surrounding the federal estate tax may have caused the topic of state death taxes to take a second fiddle in your planning. Depending upon the current net worth of your estate and where you reside for tax purposes, the applicable tax in your own proverbial backyard may be more impactful than the federal estate tax. Here’s some information to use in your planning.
What happened to the state estate tax in 2001 when EGTRRA passed?
When Congress passed the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) of 2001, it amended the federal estate tax laws so that the estate tax decreased every two years through this year, at which point it is repealed and disappears entirely. In 2011, the estate tax repeal sunsets and the tax resumes at 2001 rates - 55 percent maximum rate with a $1 million individual exemption.
Prior to the passage of EGTRRA, many state estate taxes were linked to federal law. To protect state tax revenues from EGTRRA’s impact, some states took action by enacting their own separate estate tax, retaining their current estate tax, or so called “decoupling” with the federal estate tax law, essentially opting to link with the version of the federal code that existed before it was amended in 2001.
Knowing the high level estate tax environment inside and outside your state can help you better prepare, especially if you own property in multiple states or are considering a move. Here’s a reference chart to help jump start your own research and assist you in your conversations with your estate attorney, accountant or financial advisor.
While the majority of states do not collect an estate tax, change is still occurring. Kansas and Oklahoma recently did away with their state estate taxes effective January 1, 2010. The estate tax was repealed in Illinois effective January 1, 2010.
Another important consideration for planning is whether you live n a state that currently collects an inheritance tax. An inheritance tax is different from an estate tax in that it is levied on the portion of assets received from an estate by individuals. An estate tax is applied to an entire estate before it is distributed.
Inheritance tax is currently collected in Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. This tax would potentially be applicable for estate holders who die in 2010 or later, assuming no further changes. Those of you who are several years long in the throes of serving as a loved one’s executor or personal representative may not see that state reflected. Some states, like Connecticut had an inheritance tax in prior years but presently do not.
Bottom line? The state estate and inheritance tax environment should be given due consideration in your comprehensive planning efforts. The tax rates and exemption levels have been moving targets over the past decade, essentially increasing the complexity of an already complex topic. This underscores the need to seek guidance from qualified estate attorneys, tax professionals and financial advisors who can assist you in structuring the best plan given your situation.
Lastly, it highlights the need for you to talk with your future executor or personal representative about what might be in store for him or her in the future. Remember, many family members accept the future role without thinking about what it entails. While understanding all the intricate details now may be less important, having a fundamental understanding of what duties may be involved in settling your estate, timeframes for doing so, the fiduciary standard that executors are held to, and where to seek out professional expertise is imperative in instilling a future sense of confidence in them and peace of mind for you.
For more information, visit http://www.executorsresource.com/.
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