Five Things You May Not Know About State Estate Taxes
Blaine Johnson, LUTCF®, CLTC®
1. You may live in a state with a state estate tax and/or inheritance tax
Fourteen states and the District of Columbia currently impose a state estate tax. There are four additional states with an inheritance tax.2 Two states— Maryland and New Jersey—impose both an estate tax and an inheritance tax. At first glance, the terms “estate tax” and “inheritance tax” may seem interchangeable as they are both death- related taxes. However, a true estate tax is a tax on the right to pass property onto others and is usually payable by the decedent’s estate. A true inheritance tax, in contrast, is a tax on a beneficiary’s right to receive property and is usually imposed on the beneficiaries. As a result, while estate tax rates typically do not change based on who the recipient is, inheritance taxes often vary depending on the relationship of the decedent to the beneficiary. For example, the inheritance tax rate may be zero percent on assets passing from a decedent to his/her child but may be ten percent on assets passing to his/her niece.
2. Your state estate tax exemption may be lower than the federal exemption.
While the federal estate tax exemption is $5.45 million (in 2016), a particular state’s estate tax exemption may be much lower. For example, the state estate tax exemption amount is $675,000 in New Jersey, $1 million in Massachusetts, $2,079,000 in Washington (in 2016) and $4 million in Illinois.
3. Your state estate tax exemption may not be indexed for inflation.
The federal estate tax exemption amount is set to $5 million, and is indexed for inflation starting in 2012. As a result, the 2016 exemption amount is $5.45 million. While some states have indexed their estate tax exemption for inflation—such as Rhode Island, Delaware, Washington, etc.—others, such as Oregon and Massachusetts, may not have.
4. Your state estate tax exemption may not be portable, which may necessitate additional planning.
The federal estate tax exemption is “portable”—i.e., a decedent’s unused federal estate tax exemption may be utilized by the surviving spouse in certain circumstances. Thus, if the decedent passes $1 million to his children upon death and all other assets pass to the surviving spouse, the surviving spouse may be able to utilize the decedent’s remaining $4.45 million exemption in addition to his or her own exemption. Portability may allow a surviving spouse to take advantage of his/her deceased spouse’s unused exemption even without traditional “A-B” trust planning. Most states that impose state estate tax do not currently allow for portability of an individual’s state estate tax exemption amount. As a result, a “bypass trust” may be necessary to utilize the predeceased spouse’s state estate tax exemption amount. A “state QTIP trust” may additionally be necessary in order to defer state estate tax until the surviving spouse’s death. Whether or not a state- only QTIP election may be available varies by state.
5. Your state may not have a gift tax—even if it has an estate tax.
For federal tax purposes, the gift and estate tax exemptions have been unified—with a combined lifetime exemption of $5.45 million (in 2016). Lifetime gifts that utilize the exemption reduce the amount of exemption that remains available at death. This may not be the case with state estate taxes. In several—but not all—states with a state estate or inheritance tax, it may be possible to reduce or avoid state estate or inheritance tax by making lifetime gifts.
Those contemplating lifetime gifts should be mindful that rules may be in place that prevent the use of “deathbed” gifts to avoid the estate or inheritance tax. Gifts made within one to three years of death may be viewed as deathbed gifts and may be taxable, depending on the state.
Summary
State estate, inheritance and gift tax laws vary greatly from state to state and change frequently. As such, clients and advisors should always consult with a CPA or tax or estate planning attorney regarding state estate or gift tax planning.
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About Blaine
Blaine Johnson is an agent with New York Life Insurance Company and a financial professional with nearly a decade of industry experience. He specializes in providing financial and insurance services for pre-retirees and retirees including physicians, executives, and business owners. By focusing on a particular clientele, he can provide a customized approach that responds directly to the specific needs of clients. He is a Life Underwriter Training Council Fellow and holds the Certified Long-Term Care designation. Based in Roseville, California, he works with clients throughout Sacramento and the Bay Area, as well as Southern California, Arizona, Nevada, Florida, Texas, Oregon, and Washington.
Blaine Johnson, CLTC, LUTCF®, is a Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, A Licensed Insurance Agency, 2999 Douglas, Blvd., Suite 350, Roseville, CA 95661 (916) 781-7493. Member Agent, The Nautilus Group®, a service of New York Life Insurance Company. New York Life Insurance Company, its agents or employees may not give legal, tax or accounting advice; everyone should seek and rely upon the counsel of his or her own professional advisors. Blaine Johnson, California Insurance License #0G27275.
This material was produced by The Nautilus Group. All rights reserved. It is being provided by Blaine Johnson as a courtesy.
