Beware of State Estate Taxes

By: Gal N. Kaufman

Earlier this year, Congress enacted “permanent” gift, estate and generation-skipping transfer tax (collectively referred to as “transfer tax”) legislation.  (The word “permanent” is in quotations because despite the apparent permanency of the legislation, President Obama’s recently announced budget proposal calls for a decrease in the relevant transfer tax exemptions.)  As of 1/1/13, the gift and estate tax exemption is $5.25M per person, and the generation-skipping transfer tax exemption is also $5.25M per person. Each exemption is subject to increase in the future based on an indexing formula.  However, for taxpayers in many jurisdictions, including Maryland and the District of Columbia, the state estate tax exemption remains at $1M per taxpayer.

For example, an individual who passed away  in 2013 with a taxable estate of $5M would pay no federal estate tax (since the individual’s taxable estate is less than the $5.25M federal estate tax exemption). However, the estate of this same individual, if she died in 2013 while a resident of, e.g., Maryland, would owe approximately $400,000 of Maryland estate tax.

In terms of tax planning to avoid state estate taxes, many clients have given serious consideration to moving out of their current state of residence, if that state is a state that has an estate tax. For example, Virginia and Florida are two states that no longer have a state estate tax.  If moving from your current state of residence is not an attractive option, then one other planning opportunity exists to reduce the impact of state estate tax: gifts.  Unlike its federal counterpart, all states that have a state estate tax do NOT have a gift tax (other than Connecticut, which still imposes a gift tax on certain gifts). Therefore, in theory at least, a client who has an estate that would be subject to state estate tax upon death could give away all of her assets on her death bed, and avoid all state estate tax upon death. However, deathbed tax planning is not advisable.  Instead, any client with assets above her state’s relevant state estate tax exemption (again, $1M for both MD and DC residents) should consider proper and well thought out gifting strategies prior to nearing her deathbed. Moreover, while it appears that the federal transfer tax exemptions are high enough to eliminate planning for most clients, state estate taxes remain in flux, which means that it is just as important now than before to keep your estate plan up to date.

Gal N. Kaufman is a Principal attorney in Offit Kurman’s Washington office.  Mr. Kaufman has nearly twenty years of experience as a trusts and estates attorney, providing client services in the areas of estate planning and estate and trust administration.  He can be reached at 240.507.1709 or gkaufman@offitkurman.com.