Estate Taxes

I was at the TAFAC meeting today, and in the TAFAC Personal Property Issues Committee we discussed several topics. A couple of side comments within the discuss was interesting and worthy of passing along. The first was a reference to an interesting article in Kiplinger about state estate taxes, and the other was a comment on potential changes to the tax code, particularly for charitable donations.

Regarding potential changes to the tax code, keep in mind it is still very early and proposals have a tendency to change, sometimes considerably or, may not be revised at all.  The quick discussion at the TAFAC meeting was about taxes, both estate and income. The estate tax discussion was about the article in Kiplinger about how many states are doing away with estate taxes or increasing the thresholds. I also believe the estate tax may be changed or done away with in the future. This certainly may impact appraisers, but keep in mind if a beneficiary is keeping an item, it will need to be valued, specifically for a step up basis for when it is potentially sold. See the block quote below for the Kiplinger article.

The other topic was on possible changes to the tax code under President Trump. One of his early proposals has a cap on itemized deductions of $100,000 for an individual and $200,000 for a married couple filing jointly. From what I understand there may also be a provision to carry forward the deduction over 5 years, so there is potential of taking a $1 million deduction. But, if passed, and I am not sure that is likely as there will be opposition (and I dont wish to be an alarmist), these potential changes could impact the appraisal profession.

CNBC reported on the possible new plan "Trump's tax plan also caps itemized deductions at $100,000 for single filers and $200,000 for married couples filing jointly. "The potential limitation of charitable contributions within the $200,000 framework is very controversial," Speiss said. There is no guarantee, even with a Republican-controlled Congress, that these proposals will become law."

Kiplinger reported on state estate tax exmemptions

Following Uncle Sam's lead, several states are raising their estate-tax exemptions, while some are ditching death taxes altogether.

From Kiplinger's Retirement Report, January 2017

Long ago, Ben Franklin famously wrote that nothing can be said to be certain except death and taxes. More than 200 years later, death remains inevitable, but increasingly the tax man is backing off when the Grim Reaper appears, with more states letting more estates off the hook from state death taxes.

The loosening grip of state death taxes falls in line with Uncle Sam’s ever-increasing estate-tax exemption, which rises to a sky-high $5.49 million per taxpayer for 2017. About one-third of the states have their own death tax, and several of them are raising their exemptions; others are repealing their state estate tax. “The general trend has been toward eliminating state death taxes,” says Charles D. Fox IV, a partner at McGuireWoods and chair of the firm’s tax practice.

The most recent state to send its tax toward oblivion is New Jersey, long known for socking the most modest estates. Gov. Chris Christie signed the phaseout into law in October. The estate-tax exemption climbs to $2 million in 2017 (up from $675,000), and the tax disappears in 2018. Garden State residents will still have an inheritance tax to contend with.

New Jersey’s move falls on the heels of Tennessee’s repeal. The Volunteer State became death-tax-free in 2016.

Instead of repealing, some states are following the lead of Uncle Sam. Maryland and New York have been raising exemption levels to eventually match the federal estate-tax exemption. Maryland’s threshold climbs to $3 million for 2017, and New York’s reaches $5.25 million for deaths on or after April 1, 2017.

Still, death taxes bedevil residents in 18 states, plus the District of Columbia. Fourteen states and D.C. have a state estate tax, while six have an inheritance tax. Two states have both: Maryland and New Jersey (until its estate tax dies off in 2018). Estate tax is paid by the estate of the decedent, based on the size of the estate; inheritance tax is paid by the heirs, based on their relationship to the decedent and the amount received.

Deconstructing Death Taxes

If you want to move in retirement, you may want to not only consider a state’s taxes on your retirement income (see Retirees: Reduce Your State Tax Bill), but how tax policy will affect your heirs. The easiest method of dealing with death taxes: “Avoid the whole mess by living in a state that doesn’t have one,” says Fox. “But if you do, consult with an estate-planning lawyer for ways to avoid or mitigate the tax.”

If your state has a death tax, you need to know how it works. The states with the lowest estate-tax exemptions in 2017 are Massachusetts and Oregon, both of which tax estates that exceed $1 million. (In states that impose an estate tax, assets that go to a surviving spouse don’t count toward the threshold.) If you die in Oregon with a $1.5 million estate, $500,000 of the estate is subject to tax at a 10% rate (Oregon’s rates range from 10% to 16%). Estate tax rates tend to top out at 16%, but rates climb to 20% in the state of Washington (see the 10 States With the Scariest Death Taxes).

Some states have a “cliff” tax. An estate that’s worth 105% of New York’s estate-tax exemption triggers tax on the whole estate, not just the amount exceeding the exemption. Estates that exceed Illinois’ $4 million estate-tax exemption by even a dollar will trigger tax for the entire amount, says Mike Piershale, president of Piershale Financial Group, in Crystal Lake, Ill.

The $5.49 million federal exemption protects the vast majority of estates from Uncle Sam. But if your state has a lower exemption, you may benefit mightily from planning advice from an estate-tax expert.

While the federal estate-tax exemption is “portable” between spouses, most state estate-tax exemptions are not. Portability allows the surviving spouse to use any remaining estate-tax exemption left over from the first spouse to die. Hawaii and Delaware offer portability; Maryland will recognize portability in 2019.

In other states, “you can create portability with a credit-shelter trust,” says Piershale. The trust helps maximize the state exemptions of both spouses. Say the state exemption is $1 million. A spouse could leave up to $1 million in a credit-shelter trust to heirs, while the remaining estate passes tax-free to a surviving spouse. When the second spouse dies, $1 million of her estate is exempt for heirs—effectively exempting $2 million of the couple’s total estate from state estate tax.

Snowbirds may have an opportunity to save. Piershale has clients who split their time between Illinois, which imposes a death tax, and Florida, which doesn’t. In one client’s case, he says, a couple will save $300,000 in death tax because they changed their primary residency. Snowbirds can rack up big savings by making the non-death-tax state their primary residence, but they need to make sure they spend the majority of the year there and can provide significant evidence of that state being their primary home.

Inheritance Tax Snares Some Heirs

Even in states with an inheritance tax, many heirs escape unscathed. Generally, the closer the relationship to the deceased, the less likely the heir will have to pay the tax; the more distant the relative, the more likely.

Spouses get a pass, and often so do lineal descendants, such as children and grandchildren. In Kentucky, a “Class A” beneficiary—that is, a spouse, parent, child, grandchild, brother or sister—is exempt from the state’s inheritance tax. Other beneficiaries, say a nephew, are subject to tax rates of up to 16%.

Certain heirs may get a break on the rate of tax. In Pennsylvania, for example, the inheritance tax for lineal heirs is 4.5%, while it’s 12% for sibling heirs.

When it bites, the inheritance tax can kick in at low levels. New Jersey, for instance, excludes many types of heirs, but for those who must pay it, the tax is triggered when inheriting property worth $500 or more.

Source: Kiplinger