Federal Exemption

Some States Have No Estate or Inheritance Taxes

The District of Columbia already moved to reduce its estate tax exemption from $5.67 million in 2020 to $4 million for individuals who die on or after Jan. 1, 2021. A resident with a taxable estate of $10 million living in the District of Columbia will owe nearly $1 million in state estate tax, says the article “State Death Tax Hikes Loom: Where Not To Die In 2021” from Forbes. It won’t be the last change in state death taxes. estate taxes

Seventeen states and D.C. levy their own death taxes in addition to the federal estate tax, which as of this writing is so high that it effects very few Americans. Florida isn’t one of those states.  In fact, Florida doesn’t have an estate tax or an inheritance tax, which is one of the many reasons it’s such a popular place for older Americans to live.

In 2021, the federal estate tax exemption is $11.7 million per person. But in 2026, it will drop back to $5 million per person, with adjustments for inflation. However, that is only if nothing changes.

President Biden has already called for the federal estate tax to return to the 2009 level of $3.5 million per person. The increased tax revenue purportedly would be used to pay for the costs of fighting the “pandemic” and “infrastructure improvements”.  It remains to be seen whether this will actually happen because many law makers believe such a move would potentially destroy the family businesses, farms and ranches that drive and feed the economy. President Biden has also proposed eliminating the step up in basis on appreciated assets at death.

Changes that take place at the federal level are likely to drive changes at the state level. States that don’t have a death tax may look at adding one as a means of increasing revenue, meaning that estate planning may become even more important in the near future.  States with high estate tax exemptions could also reduce their state exemptions to the federal exemption, adding to the state’s income and making things simpler. Right now, there is a disconnect between the federal and the state tax exemptions, which leads to considerable confusion.

Five states have already made changes in 2021, in a variety of forms. Vermont has increased the exemption to $5 million in 2021.  Connecticut’s exemption will be increased $7.1 million. And the states of Maine, Rhode Island and New York have increased their exemptions because of inflation.

The overall trend in the recent past had been towards reducing or eliminating state estate taxes. In 2018, New Jersey dropped their estate tax, but kept the inheritance tax. In 2019, Maryland added a portability provision to its estate tax, so a surviving spouse may carry over the unused predeceased spouse’s exemption amount.

As mentioned above, Florida doesn’t have an estate tax or an inheritance tax, so your clients living (and dying) here in the Sun Shine State, and their families, won’t be subject to these taxes.  However, if you live in or plan to move to a state where there are state death taxes, talk with an estate planner to create a flexible estate plan that will address the current and future changes in the federal or state exemptions. While you’re at it, keep an eye on the state’s legislature for what they’re planning.

Reference: Forbes (Jan. 15, 2021) “State Death Tax Hikes Loom: Where Not To Die In 2021”

The Downside of an Inheritance

As many as 1.7 million American households inherit assets every year. However, almost seventy-five percent of all heirs lose their inheritance within a few years. More than a third see no change or even a decline in their economic standing, says Canyon News in the article “Three Setbacks Associated With Receiving An Inheritance.” Receiving an inheritance should be a positive event, but that’s often not the case. What goes wrong?

Problems with inheritance
Inheritances can be great, but they can have a downside too.

Family battles. A survey of lawyers, trust officers, and accountants conducted by TD Wealth found that at 44 percent of all inheritance setbacks are caused by family disagreements. Conflicts often arise, when individuals die without a properly executed estate plan. Without a will, asset distributions are left to the law of the state and the probate court.

However, there are also times when even the best of plans are created and problems occur. This can happen when there are issues with trustees. Trusts are commonly used estate planning tools, a legal device that includes directions on how and when assets are to be distributed to beneficiaries. Many people use them to shield assets from estate taxes, which is all well and good. However, if a trustee is named who is adverse to the interests of the family members, or not capable of properly managing the trust, lengthy and expensive estate battles can occur. Filing a claim against an adversarial trustee can lead to divisions among beneficiaries and take a bite out of the inheritance.

Poor tax planning. Depending upon the inheritance and the beneficiaries, there could be tax consequences including:

  • Estate Taxes. This is the tax applied to the value of a decedent’s assets, properties and financial accounts. The federal estate tax exemption as of this writing is very high—$11.4 million per individual—but there are also state estate taxes. Although the executor of the estate and not the beneficiary is typically responsible for the estate taxes, it may also impact the beneficiaries.
  • Inheritance Taxes. Some states have inheritance taxes, which are based upon the kinship between the decedent and the heir, their state of residence and the value of the inheritance. These are paid by the beneficiary, and not the estate. Six states collect inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Spouses do not pay inheritance taxes, when their spouse’s die. Beneficiaries who are not related to decedents will usually pay higher inheritance taxes.
  • Capital Gains Tax. In certain circumstances, heirs pay capital gains taxes. Recipients may be subject to capital gains taxes, if they make a profit selling the assets that they inherited. For instance, if someone inherits $300,000 in stocks and the beneficiary sells them a few years later for $500,000, the beneficiary may have to pay capital gains taxes on the $200,000 profit.

Impacts on Government Benefits. If an heir is receiving government benefits like Social Security Disability Insurance (SSDI), Supplemental Social Security (SSS) or Medicaid, receiving an inheritance could make them ineligible for the government benefit. These programs are generally needs-based, and recipients are bound to strict income and asset levels. An estate planning attorney will usually plan for this with the use of a Special Needs Trust, where the trust inherits the assets, which can then be used by the heir without losing their eligibility. A trustee is in charge of the assets and their distributions.

An estate planning attorney can work with the entire family, planning for the transfer of wealth and helping educate the family, so that the efforts of a lifetime of work are not lost in a few years’ time.

Reference: Canyon News (October 15, 2019) “Three Setbacks Associated With Receiving An Inheritance”

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