Estate taxes (or "death taxes," depending on your tax philosophy) are one of those things in life that confuse even very educated folks.
Fortunately, we do not have many close encounters with the subject, except when a loved one passes or as a fodder for political platforms.
Nevertheless, there are some estate tax details worth noting just to note them, if for no other reason.
In this spirit, the topic of "state estate taxes" was taken up in a recent article in nj.com titled “Estate taxes explained.”
Here are a few items I found worth passing along:
State estate taxes.
Did you know some states have their own versions of the federal estate tax and apply a lower exemption to determine your tax liability? I have addressed this in several previous posts.
The nj.com article focuses on New Jersey law and its two forms of taxation at death.
And for good reason.
First, New Jersey has an "inheritance tax" paid by the person inheriting from a decedent unless the will directs that the estate pay them.
Second, it has an "estate tax" with a $675,000 exemption, well below the current inflation-adjusted federal estate tax exemption of $5.43 million.
While New Jersey residents can do little to avoid the "inheritance tax" (short of "disclaiming" the inheritance), some serious estate tax planning is necessary to tame the "state estate tax" hit if you live there.
What if you are not a New Jersey resident, but own real estate in one of the remaining 15 states and the District of Columbia with a separate death tax from the federal estate tax?
The article warns that such tax-happy states may seek to tax your real estate. A possible solution is to hold such real estate in trust. This would allow the real estate to avoid probate and, in turn, may avoid state estate taxation on the property.
What assets are subject to estate taxation?
Essentially everything you own goes into the estate tax calculus when it comes to state and federal estate taxation, to include the death benefit amount on any life insurance you own or control.
By the way, now that you know such life insurance is included as part of your estate ... so does the IRS.
What do I mean by that?
Well, the Internal Revenue Code has a special provision that claws back into your estate any life insurance you give away within three years of death.
So much for deathbed visits by your life insurance agent with a fistful of ownership and beneficiary change forms.
One traditional solve for this life insurance dilemma, however, is to create an irrevocable life insurance trust (also known as an "ILIT").
Once created, the ILIT becomes the new owner of any current and future life insurance policy.
Although the three-year rule still applies to any current policy, the ILIT enables you to control the eventual management and distribution of the proceeds for your loved ones when the policy pays up.
Better yet, any policies purchased by the ILIT in the future will be clear of that three -year rule from the get go.
Just give it away.
If you are looking for another proven method to reduce your state estate taxes, heed the advice of George Strait and just give it away.
During your lifetime you control the 529 Plans, but the account value is outside of your estate value.
That can be a problem, especially when you may need such gifted assets for your own care over the long haul.
Portability and the Unlimited Marital Deduction.
Did you know that, with relatively little after-death administrivia, spouses can now directly pass along assets to one another and their unused estate tax exemptions?
Yes, it is true.
Can you say "portability"?
Formally known as the "Deceased Spousal Unused Exemption" (DSUE), this approach to federal estate tax planning can also work to minimize, eliminate or postpone even state estate taxes through application of the "Unlimited Marital Deduction" which allows spouse to gift during life or leave at death an unlimited amount of assets without any taxation on that transfer.
Regardless where you live and own assets, it is prudent to get and stay educated when it comes to estate planning and estate taxation.
Engage the advice and services of an experienced estate planning attorney.
So, how do you find an "experienced" estate planning attorney?
First, ask around. Friends, family and other professional advisors are trustworthy sources.
Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").
Third, either way, verify. Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.
In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: nj.com (October 18, 2015) “Estate taxes explained”