Michigan Estate Planning Blog

State Death Tax Dilemma

The estate planning world has been in a bit of shock for the past few years. While the federal estate tax exemption has climbed to ever more generous levels, many states are creating new or increasing old wealth transfer taxes. Taxpayers who are in the clear when it comes to federal death taxes may be socked with state death taxes. Will the states follow suit and drop draconian estate laws? A recent article in The New York Times, titled “Some States Are Moving to Loosen Their Estate Taxes,” suggests there may be hope. Not all states have their own form of estate or inheritance tax, one separate from the federal tax that hits with a 1-2 punch. In fact, most do not. Still, more than a dozen states, mostly northern and Pacific ones, do have such a tax. Interestingly, these state estate or inheritance taxes can be troublesome for more than just the residents of the taxing state. Unfortunately, the spaces between the federal tax and the state-level taxes can be sometimes tricky to navigate. Trickier still can be the space between two states. After all, “living” across state lines is not at all out of the ordinary, but having to think about entirely different tax schemes (sales tax aside) is generally less so. Moreover, as the original article elaborates, the states find themselves at odds and fighting jurisdictional battles. Note: An important pattern may be developing, as more states loosen the rules and either eliminate the death taxes or make them as forgiving as the federal rate. New York and D.C. have recently begun reassessing their taxes, with many more either open to debate or actually winding them down.

Reference: The New York Times (January 24, 2014) “Some States Are Moving to Loosen Their Estate Taxes”

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State Death Tax Gotchas Saginaw, MI

The Federal government may be bigger, but when it comes to estate planning you simply cannot forget state laws. If you are building your estate plan, ignore your state estate taxes (present or future) to your peril. MarketWatch recently provided some advice in an article titled “Protecting your estate in a high-tax state.” Ironically, the estate tax scare at the federal level is less of a concern at present. The IRS has issued the estate and gift tax exemptions for 2014 and the new unified exemption/credit will be pegged at a cool $5.34 million. Unfortunately, the states did not get the same memo. The states are still different and vary considerably. Certain states have their own forms of gift tax, estate tax, inheritance tax, and so on. There are even more subtle taxes such as those on real property. Even if you live in one state, you might just be affected by the laws of another state if you own the wrong kind of property or conduct business there. Where you choose to retire could also upset your estate tax planning apple cart. In addition, you may be inheriting from family members who are residents in a tax-happy jurisdiction. Consequently, it is important to follow the Boy Scout motto and always “Be Prepared.’

Reference: MarketWatch (October 28, 2013) “Protecting your estate in a high-tax state"

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State Death Taxes Hinge On Political Winds Saginaw, MI

The federal estate tax is all but dead for most Americans. With its inflation-adjusted exemption at $5.25 million per taxpayer for a combined $10.5 million for married taxpayers, for now anyway, the American Taxpayer Relief Act of 2012 has slain the beast. But what about “state” estate taxes? A recent Wall Street Journal editorial, titled “The Die Harder States,” reviews the current state of the estate tax – both at the federal and state levels – as well as the current state of our problems with it. The state level estate tax is not a problem for most states in the union. Nevertheless, it is a problem worth understanding. This is certainly true if your retirement plans might involve one of those states where the estate tax still has teeth. As noted in the editorial, 18 states (made 19 by the District of Columbia) exact some form of estate tax, sometimes in conjunction with their own form on inheritance and/or gift tax. Each jurisdiction does so to various degrees. Most of the taxing states apply their estate tax as under the former federal estate tax. Given that the federal tax has been tamed as of late, the state estate taxes pose a potential trap for unwitting estate planners. Granted, you may still “vote with your feet” when it comes to state laws. Accordingly, if you are looking to cut your overall estate taxation, then evaluate the laws of your state of residency and those of any potential states to which you may relocate in the future. When state “shopping” for tax avoidance, remember the three rules every realtor knows: location, location, location.

Reference: The Wall Street Journal (August 20, 2013) “The Die Harder States

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Watch Out for “State” Estate Taxes Saginaw, Michigan

Budgets are set to battle once more on Capitol Hill in the near future. All considered, estate planners are fairly content with the last battle and the federal estate tax laws that went into effect with the American Taxpayer Relief Act (ATRA) at the beginning of the year. Consequently, most taxpayers have been spared the federal estate tax. But don’t forget about what your state has in store for you. As a recent Kiplinger article warns, the state level transfer taxes have not fallen away like the federal transfer tax. The article, titled “Beware States With Their Own Estate Taxes,” notes that fully 21 states (plus the District of Columbia) currently impose some kind of transfer tax, whether a death tax, an inheritance tax, or both simultaneously. Furthermore, if you pay too much attention to the federal tax, then you might think you are home free in terms of exempt amounts. Unfortunately, state taxes are, generally, set with much lower exemption amounts. The Federal tax has been permanently set at a rather generous range with a $5.25 million exemption amount. On the other hand, New York starts taking a piece of the estate pie at $1 million. If you live in a death tax state, now is the time to be planning to avoid or minimize the impact. For that matter, too, where do you plan your retirement? Crossing into a new state for retirement or late-in-life care is not just about passing the “Welcome” sign on the highway. Accordingly, remember to consider how your move will affect your assets and overall estate plan. Then again, how much do you trust Congress and their idea of a “permanent” estate tax law? Already these new budget battles have given platform to new calls for a change in the “permanent” federal estate tax exemption. In fact, the Obama Budget Proposal would reduce the just-agreed-upon “permanent” exemption from $5.25 million to $3.5 million (The Washington Times here).

Reference: Kiplinger
(May 2013 issue) “Beware States With Their Own Estate Taxes”

For more information, see www.jerryreiflawyer.com