There was a cartoon in the New Yorker magazine long ago that showed a group gathered in chairs. Before them, sitting at a table, a distinguished and official-looking gentlemen with a document in hand and a poodle by his side was telling them, “Before I read your great-aunt’s Last Will and Testament, let me explain why I have her dog here with me!” Another story tells of a Will that simply read, “Being of sound mind and body, I spent it all.”
The fields are white with disappointed potential heirs who saw no money come in the door when the deceased was carried out. Maybe you can help your clients add their local government to the list of disappointees.
In addition to the federal estate tax about half the states apply their own death levy against either the estate of the deceased, the heirs of the estate, or (in two cases – New Jersey and Merry-land) both! And the local laws can carry a double whammy in that, in addition to rates that can range as high as 20% (Washington), the amount a taxpayer can exempt from tax might be much lower than the current $5,430,000 allowed by the Feds. Most don’t tax transfers to surviving spouses and do exempt certain classes of heirs from the tax. It pays to check and it’s all pretty confusing.
But the lack of a law might allow the greatest opportunity for savings. Only two states tax lifetime transfers (Connecticut and Minnesota) and some have contemplation-of-death or look-back rules (New York) pulling previously transferred property back into the taxable estate after death. But most have no form of gift taxation.
Consider the possibilities: Tom and Gisele live in Massachusetts with a combined net worth of $10 million, comfortably protected from federal tax by their two lifetime exemptions, at least for now. The problem is that Taxa-chusetts allows each only a $1 million exemption with rates as high as 16%. They decide they can live comfortably with only $2 million, so they gift the other $8 million out of their potentially taxable estate to irrevocable trusts for the benefit of their children with no tax on the transfers. Even better, they can creatively establish those trusts to include spousal life estates that allow various degrees of ongoing vicarious access to the assets during life.
If clients are not domiciled in a state with a local tax be sure that they do not own considerable property in a state that does. Most state taxes apply to anything located within their jurisdiction.
John Hancock sponsors a handy website that will, at least, alert you to whether or not a state has estate or inheritance taxes, located here. If it does, call us and we’ll dig deeper to find out the extent of your client’s exposure and how they might work with their tax advisors to minimize the bill and maximize disappointment at the Capitol.
Concerned that he have enough time to put his affairs in order one bed-ridden patient asked his attending physician how long he had to live. The doctor responded, “I believe you have about 45 minutes – but then again, you could go just like that!”