Our Take: The estate tax has taken on far more symbolic meaning (to both sides) than the amount of money at stake. Arguments against the tax often cite the experiences of family businesses that must be sold to pay the tax, but automatic exemptions and the ability to create sheltering trusts make those increasingly mythical. Wealthy people who own large, successful companies do have reason to worry about how their heirs will pay the tax and complain that the levy amounts to unfair double taxation once when they’re alive and again when they die. It will be interesting to watch the response to these proposals and, as always, watch their subtle but long-term affects on the decision-making of owners of residential and commercial and real estate.
Article from Forbes | By Ashlea Ebeling
As states address budget woes due to the pandemic, one place they may turn to for revenue as they have in past economic crises is death taxes. Already the District of Columbia has toughened its estate tax levy, effective January 1, 2021. In August, Mayor Muriel Bowser signed the “Estate Tax Adjustment Act” reducing the exemption from $5.67 million in 2020 to $4 million for individuals who die on or after January 1, 2021. A resident dying in 2021 with a taxable estate of $10 million would owe nearly $1 million in estate tax to D.C.
Seventeen states and D.C. impose their own estate or inheritance taxes separate from the federal estate tax levy, which hits far fewer people today. For 2021, the federal estate tax exemption is $11.58 million per person. It’s set to drop back to $5 million per person with inflation adjustments in 2026. But President-elect Joseph Biden has called for the federal estate tax to revert back to its 2009 level: $3.5 million per person. That change could come to help pay for fighting the pandemic and the infrastructure build-out he’s promised.
If the $3.5 million federal estate tax returns, that could prompt more changes at the state level. “Certain states that do not have a state death tax may look at one as a way of increasing revenue, and those that do have one may look at ways of revising their state death taxes to increase revenue,” says Charles “Skip” Fox, an estate lawyer with McGuireWoods in Charlottesville, Virginia. So higher estate taxes could be in your future. For example, states with higher exemptions could follow D.C.’s lead to reduce their state exemptions to the federal exemption. This would add to the states’ Treasuries, and it would make things simpler than the current system where there is a disconnect between the federal and state tax exemptions.
States that once had a death tax could reinstate them tying them to the federal system. In Virginia, which killed its estate tax in 2007, a bill (H.B. 2157) introduced this month would reinstate an estate tax as of July 1 with an exemption at the federal level and a top rate of 16%. In a nod to death tax critics, it won’t tax an estate if the majority of the assets are a working farm or a closely held business. Also, it directs the revenue stream from the tax to health care.
In addition to D.C.’s 2021 change, five states have changes effective for 2021. Changes can come in many forms: increased exemption amounts, inflation adjustments, rate changes, caps. In Vermont, the estate tax exemption has increased from $4.25 million in 2020 to $5 million for 2021 and thereafter (the Vermont exemption amount had been $2.75 million from 2011 through 2019).
Connecticut’s estate tax was set at $2 million for more than a decade, but the Nutmeg State has been phasing in higher exemption levels since 2018. For 2021, the exemption amount is $7.1 million, up from $5.1 million in 2020. In 2022, it’s scheduled to be $9.1 million, then in 2023, it would match the federal exemption level meaning it could drop precipitously if there is a federal change to $3.5 million. At the same time, Connecticut has been increasing the lower end of its rate schedule. Last year, the estate tax rate was 10% to 12%. For 2021, In an appeal to keep the wealthiest in Connecticut, the state has a $15 million cap (this represents the tax due on a Connecticut estate of approximately $129 million). If you’re thinking of whittling down your estate by making gifts, Connecticut is the only state that imposes a state gift tax.
In three states, inflation adjustments have caused increases to the exemption levels for 2021. In Maine, the exemption amount goes to $5.9 million in 2021, up from $5.8 million in 2020. In Rhode Island, the exemption amount is $1,595,156 for 2021, up from $1,579,922 in 2020. In New York, the exemption amount climbs to $5.93 million in 2021, up from $5.85 million in 2020. (The New York estate tax is a cliff tax: If the value of the estate is more than 105% of the exemption, the exemption will not be available and the value of the whole estate, not just the amount over the exemption amount, is taxed.)
Generally, over the past decade, states have been reducing estate tax burdens or eliminating the estate tax altogether, but some have been going in the opposite direction. New Jersey got rid of its estate tax but kept its inheritance tax on the books in 2018. Inheritance taxes can kick in on the first dollar and generally apply to distant relatives and friends, not spouses and direct descendants (but there can be unhappy heirs: New Jersey’s inheritance tax applies to siblings, for example). In 2019, Maryland added a portability provision to its estate tax, meaning a surviving spouse can carry over the unused predeceased spouse’s exemption amount, essentially doubling the $5 million individual exemption to $10 million for a married couple. Watch out: The federal estate tax has a portability provision, but most states do not.
Targeting the richest estates with rate hikes is one way for state to grab revenue: Effective January 1, 2020, Hawaii increased the rate of its state estate tax on estates valued at over $10,000,000 to 20 percent, for example.
What should you do if you live in, own property in, or plan to move to a death tax jurisdiction? Talk to an estate planner, and discuss how you can draft a flexible estate plan to account for potential changes in the federal exemption and/or the state’s exemption. This can involve the use of disclaimer trusts or other techniques such as separate QTIP (qualified terminable interest property) elections for state purposes in those states that permit QTIPs. And watch your state legislature.
