As a result of the Economic and Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), our federal estate tax system has changed greatly. As we noted in our Spring 2004 newsletter, changes in federal estate taxes caused an unexpected reduction in the amount of estate taxes collected by each state. As you can imagine, the states quickly began revising and even creating laws designed to recoup the lost revenue.
Many people will be affected by these changes. In this article, you will find some guidelines to help determine if you are affected and what you can do about it.
A number of states have already amended their laws, effectively increasing their estate taxes to recover the lost revenue. These include: D.C., Maine, Massachusetts, Minnesota, Nebraska, North Carolina, Rhode Island, Vermont, Virginia, and Wisconsin. Other states have created stand-alone estate taxes, including: Kansas, Maryland, New Jersey, Ohio, and Pennsylvania.
If you live in one of these states and did your estate planning more than a year ago, you probably did not take these tax law changes into account. The language in your wills or trusts may refer to federal estate tax law and may inadvertently cause you to pay more estate taxes at the state level.
In Maryland for example, if your estate documents call for funding a credit shelter trust to the federal exclusion level (currently $1.5 million), your estate could end up paying Maryland as much as $64,000 in estate taxes. Any estate valued at more than $1 million is now subject to Maryland estate tax. The language in your wills and trusts may have been written at a time when state taxes were less of an issue than they are now. In the past, state laws were in alignment with the federal laws. Now that the states have �decoupled� from federal estate tax laws, the rules of the game have changed.
Single individuals in Maryland with estates over $1 million don�t have very many options to avoid the new tax. One technique is to make gifts during your lifetime, under the annual gift exclusion amount of $11,000, to reduce the value of your overall estate and thereby either reduce or avoid Maryland estate taxes. Charitable gifts made by your estate will also reduce estate taxes.
Married Marylanders will have a few more planning opportunities. If you are a Maryland couple with a combined total estate valued between $1 million and $3 million, you will want to be sure that your estate planning documents are flexible enough to cover both federal and state law.
What Should You Do
If your estate is worth more than $1 million, we recommend you revisit your estate plan with your financial advisor. To prepare for the meeting you should:
1. compile a current listing and valuation of your assets, liabilities, insurance benefits
2. review your desires for transferring your estates to your heirs
3. review your plans for gifting during your lifetime
4. review changes to your states� estate tax laws
You will then be prepared for a visit with your attorney to make the appropriate changes to your estate planning documents.