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Don't Overlook State Death Taxes in Estate Plans
by Jefferson Pilot
The ultimate status of the federal estate tax is uncertain, at best. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created a patchwork quilt of changing exemptions and rates, plus an eventual return to an exemption of $1 million in 2011. While EGTRRA was passed in a time of significant surplus, the current deficit and world events make it unlikely we’ll ever see full repeal of the estate tax. A more likely compromise that appears to be attracting support is an increase in the exemption amount to somewhere between $2-3.5 million per person and a decrease in the top tax bracket to perhaps 40-45%.
Regardless (or perhaps because of) what happens to the federal estate tax, states have now begun to modify their death tax systems. Prior to EGTRRA, most states had adopted a “sponge tax” regime, which set state death taxes at the maximum credit allowed on the estate tax return for state death taxes paid. These numbers were determined by the federal “state death tax credit” table. This linkage between federal and state death tax amounts did not increase, but merely reallocated, total death taxes due.
Soon after EGTRRA was passed, states began to “de-couple” their death taxes from the federal scheme. This occurred partially because of concerns over stability and predictability of state death tax revenues when tied to an ever-changing federal system.
More importantly, EGTRRA put in place a systematic reduction and eventual elimination of the credit for state death taxes on the federal return. Under EGTRRA, the credit was reduced by 25% in 2002, by 50% in 2003 and 75% in 2004, and totally eliminated in 2005. At that point, a deduction for state death taxes will only be allowed for taxes actually paid. What this meant was that every state that relied on the “sponge tax” approach would have to re-write their death tax laws.
Faced with this loss of revenue, states developed their own “independent” death tax schedules. For example, Rhode Island took only 28 days after President Bush signed EGTRRA 2001 into law to enact a separately administered estate tax system. The net effect of these changes will be to generally increase total death taxes due. Planners need to be sure these increased state death taxes are programmed into their calculations of estate liquidity needs.
So, when you’re doing estate tax planning for clients, remember to factor in state death taxes. Estate planning cases are a perfect market for the guarantees of Legend 300 Plus, Legend 300 XG and Duet 300 Plus. As always, contact the Advanced Sales – Case Design and Support area if you’d like help with your estate planning cases.
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