|Micahel E. Kitces|
The implementation of the Economic Growth and Tax Relief Reconciliation Act of 2001, which both increased the Federal estate tax exemption and more importantly eliminated the state estate tax credit, started the process of "decoupling" between the Federal estate tax and various states. As the years moved forward, many states retained a
To understand the loophole, it's important to understand the purpose of the gift tax itself. Contrary to what many realize, the primary purpose of the gift tax is not really just to tax gratuitous transfers of property from one person to another. Its real purpose is to provide a backstop to the estate tax, by providing a mechanism that prevents taxpayers from simply trying to dodge the estate tax by giving all their money away before they die.
For example, if someone with
For Federal tax purposes, the gift tax exemption amount has remained at – or below – the estate tax exemption for the past decade. From 2002 to 2009, the estate tax exemption rose from
However, this all changed with the Tax Relief Act of 2010, which increased both the Federal estate tax exemption and the gift tax exemption to
Some states seek to prevent this with so-called "gift-in-contemplation-of-death" rules, which stipulate that even in the absence of an overt gift tax, any gifts made in contemplation of death (i.e., on the client's deathbed, or within just a few years of death) may be drawn back into the estate for state estate tax purposes. But notably, not all states have such a rule; and even for states that do have an in-contemplation-of-death gifting rule, the provision itself varies from gifts within 3 years of death, to within 2 years of death, to within 1 year of death, and while some states draw any gifts made within the time window back into the estate for tax purposes, others only draw back gifts that were clearly made in contemplation of death (which means the gift can still avoid taxation if it can be shown that death wasn't anticipated at the time of gift).
There are 23 states that have some form of state estate or inheritance tax. But only 2 of them have a state gift tax, and only 7 others have some form of gifts-in-contemplation-of-death rules in the absence of a gift tax. For the remaining states, the door appears to be wide open… and for some of those 7 states, the door may still open if death is not necessarily imminent.
The solution for states is relatively straightforward. The states with a state estate tax can either implement gifts-in-contemplation-of-death rules, or an outright gift tax (or both). Many states may well take that step soon, given the opportunity under the current rules for taxpayers in many states to completely eliminate any estate tax burden on estates between
(Editor's Note: This post should not be construed as legal advice. Please, please consult with an attorney who is familiar with your state's inheritance, estate, and gift tax rules, gifts-in-contemplation-of-death rules, and any other recent legislation that may have been enacted in your state, before entering into any gifting strategies!)
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