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Tax Day Passes, But States Still Love the Estate Tax Jon E. Dougherty, NewsMax.comToday may end tax season for the living, but dying can be a tax nightmare – especially in some states that see a person’s passing as a windfall for big government. Despite the national movement for tax cuts, including the 2001 Bush plan which calls for a reduction of the estate tax, a number of state legislatures have decided to use the opportunity increase their cut of estate taxes. As part of the overall Bush-GOP package, the so-called "death tax" on estates will gradually disappear each year until, in 2010, it sunsets altogether. Major Victory This provision alone was hailed by Republicans as a major victory for families and their relatives, each of whom work hard for many years to accumulate wealth and provide themselves a comfortable living. But a number of state legislatures have begun "de-coupling" from the federal estate tax cuts which, according to Elizabeth C. McNichol of the Center on Budget and Policy Priorities, means "protecting the relevant parts of their tax code from the changes in the federal tax code, in most cases by remaining linked to federal law as it existed prior to the change." "In most states, estate and inheritance taxes are designed in such a way that states will face either a full or partial loss of estate tax revenues as this credit is phased out," she writes, noting the federal estate tax legislation repeals over four years (instead of 10) the federal estate tax credit to which state estate taxes are tied In other words, the estate tax may be fading on the federal level but not in states that have chosen to de-couple. Seventeen states and the District of Columbia are currently de-coupled, says the CBPP: Kansas, Illinois, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia, Washington, Wisconsin. "Illinois, Maryland, Massachusetts, New Jersey, North Carolina, Rhode Island, and Vermont enacted legislation linking their estate taxes to the federal estate tax as in effect before the 2001 tax bill," writes McNichol. "Minnesota, which passes a tax conformity package each year, explicitly elected not to change its estate tax to conform to the federal changes. Maine has elected to decouple at least through 2004, and Wisconsin has decoupled through 2008. Nebraska decoupled by creating a separate state estate tax on estates that exceed $1 million based on the federal law before the 2001 changes." The Worst States Other states' legislatures have enacted exemption limits, but if your net worth surpasses them, your estate will be hit with hefty inheritance or "gift" taxes upon your death. According to Forbes Magazine, they are:
Plan Your Death "I tell clients to do the best plan, tell me the day you're going to die, the day your spouse is going to die and the state of the federal and state estate tax laws when you both die," an exasperated Timothy Crawford, a Racine, Wis. lawyer, told Forbes. If you live in such a state but don't want to move, the best thing to do, say estate planners, is to consider giving away your assets to relatives in the meantime. Forbes says any individual can give anyone else $11,000 a year without having to fret about federal or state gift taxes. "So a couple can give their two married kids, the kids' spouses and their four grandchildren a total of $176,000 a year," the magazine says. There is a downside, however. "If you give away appreciated assets before your death, your heirs take on your basis in the assets and lose the step-up in basis they'd get if they inherited them," says Forbes. Majority Benefits Still, says CBPP's Daniel Tenny, combined federal and state estate taxes "will decline for the vast majority of estates when a state decouples from the federal estate tax cut." "Most states currently tax estates exclusively through a 'pickup' tax linked to the federal tax code," he writes, in a June 2002 policy paper. "States that decouple from the federal tax code will impose taxes as if the federal tax bill had never been enacted. Thus, decoupling does not increase state taxes for any taxpayer compared to their level before the federal tax bill was enacted," says Tenny. While the phaseout of the state estate tax credit will serve to increase federal taxes, "since the amount that can be subtracted from federal tax liability as a credit is going down, in the vast majority of estates this increase is more than offset by other reductions in federal estate taxes leading to a reduction in net estate taxes." A small amount of very large estates did wind up paying more under the first two years of the new system, Tenny said, but that was the result of a federal, not state, tax increase. "The vast majority of estates in 2003 and 2004, and all estates in 2005 and beyond, will pay less in combined federal and estate taxes even in states that fully decouple," he said. Beforehand, only the wealthiest of estates pay more in total federal and state estate taxes, the CBPP said.
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