In the past, most people didn’t have to worry about state estate taxes. Federal law provided an estate tax credit that reduced the federal tax bill by the amount paid in state estate taxes. In 2005, though, the credit was repealed, leaving big gaps between federal and state estate tax thresholds in the states that still had estate taxes on the books. The 2013 law that lifted the federal estate tax threshold to more than $5 million (adjusted for inflation) ensured that the tax remains a nonissue for the vast majority of taxpayers. But state estate taxes remain a real threat to some family legacies.
Are you affected by the estate tax? And not just the federal estate tax … your state may have its own estate tax you should be aware.
The federal estate tax is a big issue in every federal election cycle. People disagree greatly over what the estate tax exemption limit should be, what the estate tax rate should be and whether there should even be an estate tax at all.
Quite often accusations of class warfare are thrown around by candidates and their supporters. However, as the current federal estate tax exemption is $5 million (adjusted to $5.34 million for inflation in 2014) the reality is that it effects a very small percentage of American families.
Many states have estate tax exemptions far lower than the federal exemption. As a consequence, these state taxes effect more people.
Until 2005, a federal credit was given for any state estate tax paid, but that is no longer the case. That means that some families are paying estate taxes to both the federal and state governments on the same money.
A recent article in Kiplinger,titled “States Are Lowering Their Estate Taxes to Lure Retirees,” reports that four states will lower their estate taxes in 2015 in an effort to bring wealthy families into their states.
When planning your estate it is important to remember the consequences of any estate taxes in your state. This is particularly key if you move to another state for retirement.
Do your homework and consult an experienced estate planning attorney in the new state to discuss any state estate taxes and get a fresh review of your estate planning documents while you are at it.