Some States Are Moving to Loosen Their Estate Taxes

most of the United States, the estate tax is now something only the
very wealthy have to plan for. The federal exemption for an individual
this year is now $5.34 million, or $10.68 million for a married couple.
And that amount is indexed to inflation, so it will continue to rise.
exception is in the 16 states, mostly in the North, where state estate
taxes remain and ensnare middle- and upper-middle-class residents — the
very people the high federal exemption was supposed to protect.
worst for taxpayers is New Jersey, with the lowest exemption in the
country, $675,000 a person, and a rate that tops out at 16 percent.
(Rhode Island is second.) New Jersey also has an inheritance tax — for
bequests to, say, a niece or friend — which starts to be applied at
$500. The rate is 15 percent until the amount reaches $700,000 and then
it rises to 16 percent. (One concession: The estate pays the higher of
the two taxes, not both.)
week, New York’s governor, Andrew M. Cuomo, took a step toward bringing
the state’s estate tax in line with the federal one. And he is not
alone among governors of cold-weather states (along with the District of
Columbia) that have realized affluent residents are moving to states
without estate taxes (and in some cases, income taxes) and in doing so,
depriving their old state of the other taxes they paid, like property,
sales and income tax.
week, Gov. Andrew M. Cuomo of New York proposed raising the state’s
estate tax exemption. Gov. Chris Christie’s state, New Jersey, has the
lowest estate tax exemption in the country at $675,000 a person.


have a lot of people moving out of these jurisdictions to avoid the
state estate tax entirely,” said Samuel Weiner, co-chairman of the tax,
trusts and estates department at Cole Schotz, which has offices in New
York and New Jersey. “I have people all over Florida. We even wrote a
book on how to establish a residency in Florida.”
York’s current exemption is $1 million a person with a top rate of 16
percent. Governor Cuomo proposed raising the exemption to $5.25 million
by 2019, indexing that to inflation and lowering the top rate to 10
percent. (That tax is still in addition to the 40 percent federal estate
tax rate.)
York is not alone in re-evaluating this. Indiana repealed its
inheritance tax, and Ohio ended its estate tax. Tennessee is in the
process of phasing out its inheritance tax, and Maryland and the
District of Columbia are reviewing their estate taxes.
is a strong possibility that the gap is going to be closed over a few
years,” said Jamie C. Yesnowitz, a principal at Grant Thornton and
chairman of the American Institute of Certified Public Accountant’s
state and local tax technical resource panel. “Once some of these other
states see New York and D.C. are doing this, I would find it
unsurprising if some of these other states join the bandwagon.”
— or if — that happens, people who have more money than their state’s
exemption but less than the federal exemption generally have three
options: set up trusts to reduce or defer the tax, start making gifts to
reduce the estate or move. All have complications and pitfalls.
L. Klein, managing director of family office services and wealth
strategies at Wilmington Trust, said a married couple could set up a
credit shelter trust for state estate taxes. When the first spouse dies,
the amount of the state’s exemption would go into a trust. The
remainder would pass free of tax to the surviving spouse and any
additional tax owed would be assessed when that spouse died.
trusts were commonly used as the federal estate tax exemption rose over
the last decade. What complicates this for state estate planning is
that the legislation that set the federal estate tax exemption and rate
last year included a provision, called portability, that allows
surviving spouses to use their deceased spouses’ exemption even if they
did not set up a credit shelter trust.
means that a married couple today would have an exemption of $10.68
million without much planning at all. Not so with states like New York
and New Jersey that do not have portability.
New Jersey, a couple with $1.35 million would owe no estate tax when
the first spouse died. If the second spouse died with that same amount,
the estate would owe $55,000 in New Jersey tax.
ironic because you’d think families with smaller estates don’t need a
complicated estate plan,” said Laura A. Kelly, a partner at McCarter
& English in Newark. “But these are the families that can least
afford to pay the tax. If you have a credit shelter trust to get the New
Jersey exemption, the surviving spouse can have access to it and get
the rest.”
such estate planning is standard for people worth tens of millions of
dollars, it is less common for affluent couples worth several million
dollars because of the cost and time needed to set them up. But it is
worth it.
a couple in New York with $5 million in assets. They would owe no
federal estate tax. But what they would owe to New York would depend on
their planning, said Ita M. Rahilly, a partner at the accounting firm
Vanacore, DeBenedictus, DiGovanni & Weddell.
each spouse had $2.5 million in his or her name, $1 million would go
into a credit shelter trust upon death and the marginal estate tax rate
on the remaining $1.5 million would be 8 percent, she said. If the
spouse who died second had all $5 million in her name, that marginal
rate would be 11.2 percent on the amount over the exemption.
“This requires a whole rethink,” Ms. Rahilly said.
One upside: People who bought life insurance to cover federal estate taxes could use that policy to pay state estate taxes.
option is to give away money while you are still alive. Only
Connecticut and Minnesota have state gift taxes that are applied below
the federal gift tax exemption, which is the same as the federal estate
tax exemption. (This is separate from the annual gift exclusion of
$14,000.) Some states, however, consider gifts made close to death for
estate tax purposes.
when you give heirs a gift of, say, appreciated stock, you are also
giving them all the unrealized gains the stock has from when you bought
it — known as your cost basis. When they sell that gift, they are going
to have to pay capital gains on it.
is where people need to make a calculation. Depending on the
recipient’s tax bracket, that rate could be lower than the state estate
tax or it could be much higher. (When someone dies, the cost basis goes
to what it was on the date of death, called a step-up in basis, and
essentially erases all of the embedded gains.)
Massachusetts, for example, anyone who received an asset with embedded
gains and sold it would also be subject to the state’s 5 percent capital
gains tax, which is on top of the federal rates, said Beth C. Gamel,
managing director at Argent Wealth Management. A person in the highest
tax bracket for capital gains and subject to the 3.8 percent Medicare
tax would pay a capital-gains tax of 28.8 percent on that asset. The
highest rate for Massachusetts’s estate tax is 16 percent, with an
exemption of $1 million.
Gamel added that Massachusetts, unlike many other states and the
federal government, allowed people to make large gifts on their deathbed
and not have those assets counted for estate tax. This kind of gifting
would work if the person had a lot of cash to give. It would also work
if the recipient was in a lower tax bracket in a state like New
Hampshire, which doesn’t have its own capital gains tax.
of this is terribly difficult for experts to figure out, but it is
time-consuming and requires paying lawyers and accountants for advice.
The headache factor is high, particularly when in most states a simple
will would do the trick for federal estate taxes. For those dispirited
by this, Mr. Weiner of Cole Schotz had simple advice: “Move to Florida.”
the risk is that people won’t really move: They will spend the winter
there and the rest of the year at their home in the Northeast. For the
move not to be challenged, they have to establish residency there, with
proof like drivers’ licenses, voter registration, country club
memberships and church affiliations.
want to straddle this gray line,” Mr. Yesnowitz of Grant Thornton said.
“But states are looking for that. New York is a hotbed for that kind of
litigation because of the stakes involved.”
The trouble could be worth the tax savings — and warmer winters.