ESTATE PLANNING SHOULD INCLUDE PLANNING FOR STATE DEATH TAXES

Posted by Thomas J. Bogar on November 20, 2009

Next year, the federal estate tax exemption is supposed to go away, meaning that no federal estate tax will be imposed on any estates for decedents dying in 2010.  However, there is a House bill that proposes keeping the current exemption of $3.5 million in place for 2010.   This means that no federal estate taxes will be imposed on estates with net value than $3.5 million.  Fortunately, at these levels, about 5,500 estates are taxed at the federal level each year.  Unfortunately, estates less than $3.5 million will still be taxed at the state level.  Considering the current economic crisis, many states have implemented their own death taxes capturing lost revenue through the imposition of an estate tax.  Delaware just added an estate tax this past year.  The estate tax is in addition to an inheritance tax imposed on the net estate.  By contrast, the inheritance tax is based on the particular beneficiary’s share of an estate.  Some states impose both an estate and inheritance tax (i.e., New Jersey on estates greater than $675,000), while others (like Pennsylvania) impose one of the two.  While other states, like Florida, do not impose any death taxes.  To make matters worse, Congress is considering eliminating the state death tax deduction which would affect estates subject to the federal rate.

 So how should couples concerned for state death taxes plan their estates?  One suggestion for couples whose estates are not subject to federal estate taxes but are subject to state estate taxes: consider bypass trusts as part of their estate plans.  On the death of the first spouse, assets up to the state (and/or federal) estate exemption would pass into the bypass trust which can be drawn on by the surviving spouse.  When the survivor dies, the assets in the bypass trust will pass to remainder beneficiaries free from estate taxes.