All the publicity surrounding the federal estate tax may have caused the topic of state death taxes to take a second fiddle in planning.
Depending upon the current net-worth of your client's estate and where he or she resides for tax purposes, the applicable tax in his or her own proverbial backyard may be more impactful than the federal estate tax. Here's what you need to know in order to provide your clients with sound, practical guidance that is relevant for the times.
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the federal estate tax laws so that the estate tax decreased every two years through this year, at which point it is repealed and disappears entirely.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, with exemption at a respective 55 percent maximum 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 your clients who may own property in multiple states. Here's a reference chart to help jump start your own research and assist you in your conversations.
States that currently assess an estate tax and accompanying thresholds:
|State||Maximum estate tax rate ||2010 exemption amount|
* Information is applicable for estate holders who die after January 1, 2010. Information provided is not intended as legal advice and should not be construed as such.
As indicated in the above chart, while the majority of states do not collect an estate tax, change is still occurring. Kansas and Oklahoma recently abolished 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 The estate tax was repealed in Illinois effective January 1, 2010.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 your client lives in 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 along in the throes of providing information to a deceased client's executor or personal representative may not see your 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 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 for advisors to partner with qualified estate attorneys and tax professionals who can assist clients in structuring the best plan given their situation.
Lastly, it highlights the need for the advisor to be the quarterback for the client for broad issues beyond the investment portfolio. More client education and discussion regarding estate planning for your client and his or her future executor or personal representative is key.
While understanding all the myriad of details now may be less important, having a fundamental understanding of what duties may be involved in settling the estate, timeframes for doing so, the amount of personal liability assumed, and where to seek out professional expertise is imperative in instilling your client's sense of confidence in you and peace of mind in his or her plan.
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