Estate State Taxes: More than a Tongue Twister

10/30/2015

With every state seeking additional revenue and every candidate seeking additional votes, estate taxes have become part of many politicians' platforms. Most of us pay more attention to estate taxes on the federal level, but estate taxes on the state and federal level have changed a lot in recent years. Not everyone is clear on how these changes apply to them and their estate planning. Key point to keep in mind - state and federal taxes are very different from one another. The bottom line: everything you own, including the face value of insurance policies where you are an owner, gets taxed. The federal estate tax exemption is $5 million, and federal estate tax of approximately 35% is levied on any estate valued at more than $5 million. Using the "portability" feature, any married person can pass along any unused portion of their $5 million to their spouse.

State estate taxes are very different from federal tax laws, both of which are examined in "Estate taxes explained," from nj.com. Not only are state taxes difficult to understand, but they vary greatly from state to state. One local example for New Jersey readers is the unlimited marital deduction: for a married couple, the surviving spouse does not have to pay either federal or state estate taxes when the first spouse passes away.

But things can get pretty tricky quickly when you own real estate in a state or states that are not your state of residence. When you die, those other states may seek to tax your estate with their own very different state estate tax. A smart way to avoid this issue is to establish a trust to hold that property. The surest way to avoid estate taxes is to give assets away. However, that's a serious step when you might need those assets to provide for you and your family during your lifetime.

Another way would be to create an irrevocable life insurance trust. In that situation, the trust, and not you, "owns" the life insurance, and if life insurance is purchased directly into the trust, there is no waiting period. But if existing life insurance is transferred into the trust, there's a three-year wait before the life insurance is considered out of your estate.

Another way to remove assets from your estate is to establish a 529 Education Savings account with a named beneficiary. With a 529 plan, even though you're the stated "owner" of the account, it's not considered part of your estate.

Keep in mind there are only a few ways to accomplish this, so work with an experienced estate planning attorney.

Reference: nj.com (October 18, 2015) "Estate taxes explained"