Taxation & Estate Planning

State Death Taxes

By Joel A. Schoenmeyer

Ordinarily I hate using the phrase "death taxes," but I'll make an exception here because:

1. "State estate taxes" is a horrible phrase to utter; and

2. "State estate taxes" really isn't accurate, since some states have an inheritance tax (in place of or in addition to an estate tax).

Anywho, over the weekend the Wall Street Journal had a nice article by Laura Sanders entitled "State Death Taxes Are the Latest Worry." Here is the link. (By the way, unless you want to be depressed about the future of civilization, don't read the comments.)

The issue relates a bit to what I discussed in my last post about the QTIP (here -- oh, and part 3 of that series should be up next week). If the federal exemption amount is set at $3.5 million, very very few estates will need to pay the federal estate tax (according to the article, at the current level only 5,500 estates per year are subject to tax).

But if you have a state that imposes an estate or inheritance tax, they may do so at a much lower exemption amount. Illinois is at $2 million. Some states are even lower than Illinois -- $338,333 for Ohio, and $1 million for New York and many other states.

We then get two "problems":

1. Will states compete for residents by lowering their inheritance/estate tax rates? I don't actually think this is a problem (which is why I put that word in quotes above) -- the libertarian in me thinks that's just good, healthy competition. And I have to think that, for most people, non-death tax considerations are king. You literally couldn't pay me to live in most of the states with no death taxes.

2. The bigger question: How do we deal with situations where a decedent has ties to more than one state, and the states fight over the decedent's assets? The article mentions the estate of John Dorrance (described as "Campbell Soup magnate") -- New Jersey and Pennsylvania both said he was domiciled in their state, and his estate wound up having to pay taxes in both places. Yikes!

Full post as published by Death and Taxes Blog on November 05, 2009 (boomark / email).