Printer Friendly

Best (and Worst) Places to Die in 2016.

Byline: Adrienne Penta

From a federal perspective, estate planning has never been more boring. The federal gift and estate tax exemption and the rules governing estate planning have--for the most part--stayed the same since 2013. The states, however, continue to move the chess pieces around the board. While the majority of U.S. states impose no additional tax at death, some states continue to impose hefty estate or inheritance taxes.

Only the extremely wealthy will incur federal estate tax as the exemption amount is $5.45 million in 2016 (up $20,000 from 2015). Many estates not subject to federal estate tax will incur state estate tax because it often kicks in at much lower thresholds than the federal tax.

Currently, there are 32 states that impose no state estate tax.[i]The big news as of January 1, 2016 is that Tennessee abolished its estate tax, leaving only 18 states and the District of Columbia with separate estate or inheritance tax systems. Of those, 12 impose a so-called "pick-up tax," and the others impose either a stand-alone estate or inheritance tax. The good news is that even in states with an estate tax, the exemptions are migrating higher, meaning fewer estates than ever before are subject to state-level estate tax.

Pick-Up Estate Tax

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) phased out the federal state death tax credit, which was the basis of most state estate tax schemes. After EGTRRA, many states "decoupled" their estate taxes from the federal estate tax and continued to impose a pick-up tax based on a prior version of the Internal Revenue Code.

While multiple states have retained a pick-up tax, only three states currently peg their exemptions to the federal estate tax exemption--Delaware, Hawaii and Maine[ii]--but many others are increasing their exemptions, significantly in some cases. Both Maryland and New York are scheduled to increase exemptions incrementally to match the federal exemption by 2019.[iii] Minnesota and Rhode Island have also ticked upward, and D.C. has plans to increase the exemption if the District meets certain revenue goals.[iv]

Stand-Alone Estate Tax

Only Connecticut, Oregon and Washington have left the federal estate tax credit behind and imposed a free-standing estate tax. The structure of the tax is very similar to the federal estate tax, meaning that there's an exemption amount and tax is imposed above that threshold at a graduated rate schedule. Washington state began increasing its exemption amount by the consumer price index in 2014, similar to the federal exemption, and Connecticut stands pat with a $2,000,000 exemption.

Inheritance Tax

Several states impose an inheritance tax, and in limited cases, this tax is imposed in addition to another form of estate tax. Generally, inheritance tax is imposed only on certain testamentary transfers based on the recipient of the bequest (for example, transfers to individuals other than a surviving spouse, grandparents, parents, lineal descendants and their spouses, and siblings), and the amount of the tax may vary based on the recipient of the property. Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania impose inheritance tax at varying levels on transfers to certain beneficiaries.

A Look at the States

Separate State QTIP Election

Most states that continue to impose an estate tax no longer match the federal exemption amount. Thus, for wealthy married decedents, the portion of the estate taking advantage of the marital deduction for federal purposes may be less than the state marital deduction. Therefore, making a separate state QTIP election will help to achieve tax efficiency.

While portability may also be a solution to this problem in some cases, without a separate election, decedents may be forced to incur state estate tax upon the death of the first spouse to die or "waste" a portion of their federal estate tax exemption. Some states, however, like Connecticut and New York, don't allow for a state QTIP election that is inconsistent with the federal election.

(Massachusetts has a unique estate tax calculation, see Bay State Difference sidebar).

Portability of the federal estate tax exemption may help individuals planning in states that do not allow a separate state QTIP election.[v]. Instead of wasting a portion of the federal exemption or opting to pay state estate tax on first death, married taxpayers may plan to QTIP all estate property in excess of the state exemption amount and use portability to preserve the remaining federal exemption for later use by the surviving spouse. For example, in Connecticut where the exemption amount is $2 million, the executor of a $10 million estate could elect to treat $8 million as a QTIP (all property in excess of $2 million), and the deceased spousal unused exclusion (DSUE) amount of $3.45 million could be preserved for use by the surviving spouse.[vi] Of course, there are limitations to this approach. One shortcoming is that the federal exemption amount continues to grow each year as it is adjusted by inflation, and the DSUE amount does not once the original owner of the exemption is deceased. Another issue is that the generation-skipping transfer tax exemption is not portable. Therefore, portability may preserve the estate tax exemption, but GST exemption is wasted if not used at death. For estates that don't owe federal estate tax--those falling between the federal exemption amount and the lower state exemption amount--and don't allow a separate state QTIP election, portability may not work.[vii] Without a doubt, in states where no separate QTIP election is allowed, careful planning is required for estates with assets exceeding the state estate tax exemption.

[i] Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.

[ii] Delaware Code Section 1501(3)(c); HI ST ASS 236D-3; M.R.S. Title 36, Sec. 4062.

[iii] MD TAX GENERAL ASSASS 7-309; NY TAX ASS 951.

[iv] D.C. CODE 47-3702.

[v] Internal Revenue Code Section 2010(c)(2)(b).

[vi] IRC Section 2010(c)(4).

[vii] Where no federal QTIP election is necessary to reduce the federal estate tax to zero (that is, the gross estate is below the exemption amount), the election may be null and void under Revenue Procedure 2001-38. While no federal estate tax would be triggered, the result in a state like New York, which follows the federal return, is unclear. If the New York QTIP election were also nullified, then New York estate tax would be due--not the intended result. It's still unclear whether reliance on portability will work in this situation. Tech. Mem. TSB-M-11(9)M (Jul. 29, 2011). The ABA-RPTE Portability Regulation Comments asked Treasury to re-evaluate Rev. Proc. 2001-38 in light of portability.

This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. [c] Brown Brothers Harriman & Co. 2016. All rights reserved. 5/9/2016. PB-2016-05-06-0780

[1] Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.

[1] Delaware Code Section 1501(3)(c); HI ST ASS 236D-3; M.R.S. Title 36, Sec. 4062.

[1] MD TAX GENERAL ASSASS 7-309; NY TAX ASS 951.

[1] D.C. CODE 47-3702.

[1] Internal Revenue Code Section 2010(c)(2)(b).

[1] IRC Section 2010(c)(4).

[1] Where no federal QTIP election is necessary to reduce the federal estate tax to zero (that is, the gross estate is below the exemption amount), the election may be null and void under Revenue Procedure 2001-38. While no federal estate tax would be triggered, the result in a state like New York, which follows the federal return, is unclear. If the New York QTIP election were also nullified, then New York estate tax would be due--not the intended result. It's still unclear whether reliance on portability will work in this situation. Tech. Mem. TSB-M-11(9)M (Jul. 29, 2011). The ABA-RPTE Portability Regulation Comments asked Treasury to re-evaluate Rev. Proc. 2001-38 in light of portability.

This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. [c] Brown Brothers Harriman & Co. 2016. All rights reserved. 5/9/2016. PB-2016-05-06-0780
COPYRIGHT 2016 ALM Media, LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2016 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:ThinkAdvisor
Geographic Code:1U2NY
Date:May 17, 2016
Words:1753
Previous Article:SEC's Equity Crowdfunding Rules Finally Kick In.
Next Article:Raymond James Taps San Diego Branch Manager, Adds Team in Boston.
Topics:

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters