|By PAUL SULLIVAN|
For most of
The exception is in the 16 states, mostly in the North, where state estate taxes remain and ensnare middle- and upper-middle-class residents — the very people the high federal exemption was supposed to protect.
The worst for taxpayers is
This week, New York’s governor,
“We have a lot of people moving out of these jurisdictions to avoid the state estate tax entirely,” said
New York’s current exemption is
“There is a strong possibility that the gap is going to be closed over a few years,” said
Until — or if — that happens, people who have more money than their state’s exemption but less than the federal exemption generally have three options: set up trusts to reduce or defer the tax, start making gifts to reduce the estate or move. All have complications and pitfalls.
Such trusts were commonly used as the federal estate tax exemption rose over the past decade. What complicates this for state estate planning is that the legislation that set the federal estate tax exemption and rate last year included a provision, called portability, that allows surviving spouses to use their deceased spouses’ exemption even if they did not set up a credit shelter trust.
This means that a married couple today would have an exemption of
“It’s ironic because you’d think families with smaller estates don’t need a complicated estate plan,” said
Whereas such estate planning is standard for people worth tens of millions of dollars, it is less common for affluent couples worth several million dollars because of the cost and time needed to set them up. But it is worth it.
Consider a couple in
If each spouse had
“This requires a whole rethink,” Ms. Rahilly said.
One upside: People who bought life insurance to cover federal estate taxes could use that policy to pay state estate taxes.
Another option is to give away money while you are still alive. Only
But when you give heirs a gift of, say, appreciated stock, you are also giving them all the unrealized gains the stock has from when you purchased it — known as your cost basis. When they sell that gift, they are going to have to pay capital gains on it.
This is where people need to make a calculation. Depending on the recipient’s tax bracket, that rate could be lower than the state estate tax or it could be much higher. (When someone dies, the cost basis goes to what it was on the date of death, called a step-up in basis, and essentially erases all of the embedded gains.)
Ms. Gamel added that
None of this is terribly difficult for experts to figure out, but it is time-consuming and requires paying lawyers and accountants for advice. The headache factor is high, particularly when in most states a simple will would do the trick for federal estate taxes. For those dispirited by this,
But the risk is that people won’t really move: They will spend the winter there and the rest of the year at their home in the Northeast. For the move not to be challenged, they have to establish residency there, with proof like drivers’ licenses, voter registration, country club memberships and church affiliations.
“People want to straddle this gray line,”
The trouble could be worth the tax savings — and warmer winters.
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