Featured Editorial: Laws Pertaining to Federal Estate and State Transfer Taxes

As an investment adviser and retirement planning specialist, A.H. knows that the ever-changing nature of estate tax laws can significantly impact the value of retirement savings. Throughout his career, he has guided clients with expert advice, offering tax-advantaged retirement plans designed to build and preserve wealth. Recent moves by state governments and federal tax authorities have changed the rules regarding inheritances, financial gifts, and other estate planning instruments.

Source: EVO Real Estate Group

Federal Estate Tax Laws

In years past, both state and federal governments capped estate tax exemptions at fairly low rates, negatively impacting wealthy U.S. citizens with so called “death taxes”.

In 2012, passage of The American Taxpayer Relief Act (ATRA) changed the landscape for the better on the federal level. ATRA went into effect in January 2013. It retained the existing exemption for estate taxes, gift taxes, and generation-skipping estate transfer taxes of $5 million. This exemption is termed the “basic exclusion amount”. The exemption is now adjusted by inflation; in 2017, the exemption is now $5.49 million. The maximum tax rate for all estate planning purposes was raised to 40 percent.

Married couples often employed tax-sheltering strategies to preserve wealth. Wills were drawn up that included specific provisions designed to give the surviving spouse and his or her children the maximum amount that could be passed in a trust vehicle while remaining free of federal estate taxes. This is sometimes referred to as a bypass clause by retirement planning professionals. Changes in ATRA may now make such bypasses ineffective, especially if those clauses were executed prior to the increase in exclusion amount.

Portability was also improved with ATRA. Unused portions of the exclusion amount can now be used by a decedent’s surviving spouse for the purposes of estate or gift tax purposes. ATRA specifies that this new portability applies only between spouses; a decedent’s children cannot benefit from this change in the law.

State Transfer Taxes

In 2004, the U.S. Congress repealed the federal estate tax credit for state-mandated “death taxes” of those who passed away after 2004. This federal credit was instead replaced with a federal tax deduction for any state death taxes paid. The reason for this is that some states had enacted state inheritance and succession taxes, in addition to state estate taxes, to generate revenue. This had a negative and unfair effect on estate planning operations. Several states, however, increased exemption amounts to reduce the burden on citizens.

New York, for example, increased its estate exemption to match the federal tax exemption. For many years, the state’s exemption hovered at $1 million; as of 2014, the state legislature voted to increase it incrementally. By 2019, it will be at the federal exemption amount.

Connecticut lowered its estate and gift tax exemption from a high of $3.5 million to the new level of $2 million. The state has what is called a “graduated” tax system; taxation rates for estates and gifts exceeding $2 million is 7.2%, with a maximum tax rate of 10%. An estate tax cap of $20 million was also enacted by changes in the state laws. Taxable gifts made by the decedent or his or her estate may reduce the cap.

New Jersey had one of the most dramatic changes in its estate tax laws. Previously known as one of the states with the lowest estate tax exemption rates, New Jersey raised the exemption amount from $675,000 to its current amount of $2.0 million. It also eliminated the estate tax for those passing away January 1, 2018 or later. New Jersey matched its estate tax scheme on laws of the state of Florida. New Jersey will still continue to have inheritance taxes that are imposed on asset transfers from a decedent to certain beneficiaries; those asset transfers to children, spouses, civil union partners, domestic partners, and charitable organizations will be exempt from inheritance taxes.

Several other states, such as Pennsylvania and Florida, also had substantial changes in their estate taxing laws. It is critical to speak to an estate planning professional for up-to-date information on federal and state laws that may affect the value of retirement assets and after-death estate gifts or inheritances.

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