STATE ESTATE TAX AND OPPORTUNITIES FOR PLANNING

The District of Columbia recently lowered its estate tax exemption to $4 million, effective for a decedent whose death occurs on or after January 1, 2021. See “District of Columbia Changes to Estate Tax Exemption and Notarization” in this newsletter. Twelve states also impose an estate tax, with exemptions that vary widely, for example, from a low of $1 million in Massachusetts to a high of $7.1 million in Connecticut. Several states have exemptions in the $5 million plus range, such as $5.49 million in Hawaii, $5.87 million in Maine, and $5.93 million in New York. For a resident of such a state, or a non-resident who owns real property in such a jurisdiction, there may be a hefty state estate tax liability, in addition to federal estate tax, when the decedent’s estate exceeds the state threshold. For example, suppose a decedent domiciled in Maryland died in 2021, leaving an $18 million estate. This amount exceeds both the federal estate tax exemption, currently at $11.7 million, and the Maryland estate tax exemption, at $5 million. If no estate planning had been done, her estate could be subject to as much as $2.08 million in Maryland estate tax, in addition to $1.644 million in federal estate tax.

There are several ways to avoid or reduce the effect of state estate tax. One strategy for married couples is to have the first spouse leave the entire estate in a marital trust to the surviving spouse. On the death of the first spouse, the decedent’s estate would pass free of estate tax, due to the unlimited marital deduction. The trust agreement could provide on the surviving spouse’s death that the amount in excess of the state estate tax exemption is left to charity. Or a surviving spouse living in a state with an estate tax at the time of the first spouse’s death could choose to move to a state with no estate tax following the first death, and his estate would not be subject to state estate tax. The idea of changing domicile has certainly gained more traction due to the pandemic. Some individuals now working remotely have decided to relocate since their jobs may be done from any location. Factors influencing their choices include states with lower income tax rates. Jurisdictions with no state estate tax should also be a consideration. Finally, “Lifetime Gifts to Minimize State Death Taxes” in this newsletter discusses how making lifetime gifts can reduce the effect of state estate tax. Opportunities abound to reduce state estate tax liability. Residents of states with such taxes should revisit their estate plans to review their goals and take advantage of strategies to create potential tax savings both now and in the future.