When Death Meets Taxes
By: By Michael T. Palermo, JD, CFP Source: Date Posted:
State inheritance or estate taxes (“death” taxes) have historically been of much less significance in planning than federal tax. One reason is that state rates are much lower than the federal rates. Additionally, many states have for years used a “painless” system to collect state tax. They’ve charged the decedent only the exact amount that federal law has been allowing as a tax credit—a dollar-for-dollar subtraction from the federal estate-tax tab. Paying the state’s death tax hasn’t been an extra burden because the decedent’s tax preparer could reduce his federal estate tax by the same amount. In other words, “pay the governor instead of Uncle Sam.”
But this free ride was eliminated as of 2005. This change in federal estate tax law is sapping revenue from the states. State death-tax laws are therefore being modified to make up for the lost income—but it won’t be painless any more. Look for additional state tax burdens in the near future. In many places, the state death tax will be applied to much smaller estates than the federal estate tax. Make this issue a prominent blip on your planning radar screen.
From “AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy,” by Michael T. Palermo, JD, CFP, 2005, pp. 148.
preview