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Taxed ... to death: clients need to be aware of the links between state and federal estate taxes.

As anyone with even marginal interest in estate planning knows, the future of the federal estate tax has been uncertain.

By the time you read this, Congress likely will have extended the 2009 law through 2010, with the intent of coming up with a permanent approach for 2011 and beyond.

Regardless of what happens on the federal level, clients also need to think about the impact of state death taxes on their estate plans.

Previously, state death taxes could be subtracted--up to a specified maximum--from the federal estate tax as a credit.

Many states enacted a "pick-up" death tax that aligned with the federal credit.

Over time the federal credit was reduced and then eliminated.

Some states remained "coupled" to the disappearing federal credit while other states moved to "decouple" from the federal credit, resulting in higher state taxes.

Decoupling most likely is the result of the difficult economy that has reduced state revenues in recent years.

State legislatures see lower exemptions as a means of raising revenue without raising political ire--lawmakers are rarely sympathetic to multimillionaires.

Some of the states that decoupled from the federal estate tax still have an exemption of $3.5 million, the same as the federal exemption in 2009.

Other state death tax exemptions vary, from $0 in Pennsylvania (which has an inheritance tax), to $2 million in Ohio.

Tax problems can sneak up on clients with older wills that do not account for changes in state laws.

In some states, the qualified terminable interest property trust, which is available under federal law, is also available under state law.

A QTIP trust allows the surviving spouse to receive income from the trust's assets for life but the principal goes to someone else, usually the children.

If state law recognizes the QTIP, it may allow your client to take advantage of the larger federal exemption at the first death and delay the state taxes until the second death.

Clients with estates large enough to be concerned about death taxes may very well have homes in different states.

Residency generally determines where someone pays income tax. But "domicile" is a broader term used in some states to determine whether property is subject to state death taxes.

States use a variety of factors, such as voter registration, to determine whether a home is a domicile. The complexity from an estate planning perspective arises when one state has favorable income tax laws and the other state has favorable death tax laws.

Is this clear as mud?

You may not be an expert on tax law, but you can play a strategic role when your clients face state and federal death tax complexities.

As the gatekeeper to your clients' financial interests, you can steer them to a well-qualified tax attorney who understands the relevant laws.

Your client will be grateful for the advice that results in substantial death tax savings.

Contributor Debra S. Repya is senior advanced strategies counsel at Securian Financial Services Inc. She can be reached at

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Title Annotation:Life: Selling Insight
Author:Repya, Debra S.
Publication:Best's Review
Article Type:Law overview
Geographic Code:1USA
Date:Feb 1, 2010
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