New Risks of Unnecessary State Estate Taxes

The American Taxpayer Relief Act (effective 1/1/2013) created an opportunity for many to simplify their estate plans. In our companion article on this blog, Simplify Your Estate Plan Maybe, we encouraged you to consider simplification. Without simplification, many married couples risk the imposition of an unnecessary state estate tax (the focus of this post).

In Simplify Your Estate Plan Maybe, we also encouraged you to take a look at Clearwater, Florida, Attorney Alan Gassmann’s excellent summary here: Summary of the American Taxpayer Relief Act of 2012.

It sounds strange and counterintuitive, after so many decades of convincing clients that complex trust arrangements were necessary to save federal estate taxes, but it is true: by adopting a simple estate plan (and revoking the old complex one), a Connecticut married couple can save as much as $250,000 and a New York married couple can save as much $400,000.

Connecticut Residents: Many estate plans are based on documents that provide that, when one spouse passes away, an amount equal to as much as the federal estate tax exemption (as of 1/1/2013 this is $5,250,000) will pass to a trust for the benefit of the surviving spouse. If the amount passing to the trust exceeds the Connecticut estate tax exemption of $2,000,000, a Connecticut estate tax will be imposed. If the full amount of the federal exemption passes to the trust, the Connecticut estate tax would be approximately $250,000. The Connecticut estate tax would be avoided if all the $5,250,000 were to pass to the surviving spouse or if the amount passing to the trust were limited to $2,000,000 (the Connecticut estate tax exemption).

New York Residents: The New York estate tax exemption is $1,000,000. If an amount equal to the federal estate tax exemption ($5,250,000) were to pass to the trust, the New York estate tax would be approximately $400,000. The New York estate tax would be avoided if all the $5,250,000 were to pass to the surviving spouse or if the amount passing to the trust were limited to $1,000,000 (the New York estate tax exemption).

In the past, estate planners worried that, if the surviving spouse were to receive 100% of the assets, the surviving spouse’s estate would be large and exposed to the federal estate tax at the surviving spouse’s death. The rules have changed, however, to enhance the surviving spouse’s federal estate tax exemption. Not only would the surviving spouse have his or her own $5,250,000 federal estate tax exemption, the surviving spouse would also receive the unused portion of the deceased spouse’s exemption (in this case $5,250,000). As a result, the surviving spouse would have a total federal estate tax exemption of $10,500,000, more than enough to shield all but the wealthiest from the federal estate tax.

Keep in mind, however, that the state estate tax could still apply at the surviving spouse’s death. As a result, clients might still want to engage in planning to reduce state estate taxes. Such planning would resemble the planning which, in the past, revolved around the federal estate tax exemption. In addition, the surviving spouse may simply decide to move to a state that has no estate tax.

Posted on 1/13/2012 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

We frequently post articles relating to estate planning, estate settlement and elder law issues to this blog. We also post notices about our client seminars here. When we do, we send out notices to clients and friends of the firm. If you would like to get our notices, please join our mailing list by clicking below.

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Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

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