Kansas Bar Journal
75 J. Kan. Bar Assn. 8, 18-23 (2006).
The New Kansas Estate Tax
Kansas Bar Journal75 J. Kan. Bar Assn. 8, 18-23 (2006)The New Kansas Estate TaxBy Martin Dickinson and Nancy Schmidt RoushIntroduction
Kansas has a new estate tax. Senate Bill 365,(fn1) signed by Gov. Kathleen Sebelius on May 22, 2006, replaces the current estate tax as to decedents dying on or after Jan. 1, 2007. The new law will continue in effect throughout 2007, 2008, and 2009, but is repealed as to decedents dying on and after Jan. 1, 2010. At that point Kansas will no longer have a death tax.
The exemption for Kansas purposes will stay at the current level of $1 million. For taxable estates that exceed $1 million, the tax rates for 2007 are sharply below those applicable in 2006, and the tax rates decline further in 2008 and again in 2009. Very soon the Kansas Estate Tax will be "small potatoes" for even prosperous decedents. The incentive to move to a state without a death tax, such as Colorado or Missouri, should decline sharply.
The new law is "free-standing" in the sense that, except for a few cross references(fn2) and certain definitions,(fn3) it is not dependent on federal law. Unlike the prior law, it makes no mention of the state death tax credit formerly allowed under the federal estate tax. Therefore, the Kansas tax will not be affected by changes in federal law, including possible repeal of the federal estate tax. Achieving this "free-standing" status was the principal purpose of enactment of the new law.(fn4)
The new law is intended to be "user friendly." It adopts the long established and well-understood principles of the federal estate tax to build the Kansas gross estate and then subtract deductions to produce the taxable estate,(fn5) to which the tax rates (including the exemption amount) are applied, producing the amount of tax due.(fn6) There are a few respects in which these rules vary for Kansas purposes, primarily in a manner helpful to the taxpayer and the preparer. Because the new law closely follows federal law, the determination of Kansas estate tax liability should be relatively simple for an estate that is required to file a federal return. The new law is explained in greater detail below.
What's the Same as the Federal Estate Tax
The Kansas estate tax provisions mandating inclusion in the gross estate are generally identical to the corresponding federal provisions. The generally identical provisions are (1) property directly owned,(fn7) (2) property subject to a retained life estate,(fn8) (3) property subject to a retained power,(fn9) (4) annuities,(fn10) (5) joint tenancies,(fn11) (6) powers of appointment,(fn12) and (7) life insurance.(fn13)
The following provisions granting deductions are generally identical to the corresponding federal provisions: (1) funeral and administration expenses, claims, and mortgages;(fn14) (2) casualty losses;(fn15) (3) the marital deduction for outright gifts and trusts for which the qualified terminable interest property (QTIP) election is made;(fn16) and (4) the charitable deduction. (fn17)
The process for determining the Kansas tax is essentially identical to the federal process if the decedent owned only Kansas property. If the decedent owned some property with a situs in Kansas and other property with a situs outside Kansas, the tax is prorated, as explained below.
The existing procedural sections(fn18) were re-enacted without significant change.(fn19)
What's Different from the Federal Estate Tax
There are two variances from federal law in determining the gross estate-inclusion of transfers within one year of death and clarification of when QTIP property is included.
First, there is a general rule that all transfers within one year of the decedent's death are included in the gross estate.(fn20) This provision is necessary because Kansas does not have a gift tax. Without this provision, the Kansas tax could readily be avoided through "deathbed" gifts.
The inclusion rule applies only if the property transferred "would have been included in the decedent's gross estate if such transferred interest ... had been retained by the decedent on the date of death."(fn21) Such property is included in the gross estate at its value on the date of death, not the date of the gift.(fn22) The one-year inclusion rule applies to relinquishment of a power, as well as an outright transfer.(fn23) The one-year inclusion rule does not apply if the decedent made the transfer for "adequate and full consideration in money or money's worth."(fn24)
The inclusion rule is subject to important exceptions that are patterned on similar exceptions in IRC § 2035(c)(3). The inclusion rule always applies to transfers involving life insurance. Transfers not involving life insurance, however, are not subject to inclusion if IRC § 6019 did not require the decedent to file a federal gift tax return reporting the transfer.(fn25) IRC § 6019 exempts from the filing requirement four categories of gifts: (1) annual per donee exclusion gifts (currently up to $12,000 per donee),(fn26) (2) tuition and medical expense transfers,(fn27) (3) transfers qualifying for the marital deduction,(fn28) and (4) most charitable transfers.(fn29)
The Kansas one-year inclusion rule is broader in scope but shorter in time than IRC § 2035. The Kansas rule applies to all nonexempt transfers, not just the limited transfers described in IRC § 2035(a)(2), but the Kansas rule applies only to transfers within one year of death, not the three years covered by IRC § 2035(a). This is especially significant for life insurance on the life of the decedent. Under federal law, if the decedent owned the policy within three years of death, the policy proceeds are included in the decedent's gross estate despite the decedent's later transfer of the policy.(fn30) Under the new Kansas law, the policy proceeds are included only if the decedent owned the policy within one year of death.
Second, qualified terminable interest property for which a Kansas QTIP election was made is included in the Kansas gross estate(fn31) similar to the inclusion rule under federal law.(fn32) The Kansas rule applies to any property for which a deduction for Kansas estate tax purposes was allowed upon the prior death of the decedent's spouse, under the QTIP provision of the new Kansas law(fn33) or any prior Kansas law. Under current law, the Department of Revenue permits differential elections; for example, a QTIP election for Kansas purposes but not for federal purposes.(fn34) Therefore, QTIP inclusion under the new law will apply to any property for which the QTIP election was made for Kansas estate tax purposes even though the QTIP election was not made for federal purposes. Because the Kansas "pretend federal exemption" has been less than the real federal exemption over the last several years, it is likely that more property has been QTIPed for Kansas purposes than for federal purposes. In those cases, the Kansas gross estate of the surviving spouse may actually be greater than the federal gross estate. If no Kansas QTIP election was made, however, there is no basis for inclusion.
Special use valuation
The general rule is that the decedent's property is included in the gross estate at its "fair market value" on the date of death.(fn35) There is a very important exception for farmland under the new Kansas law. If the decedent was a Kansas resident, land that is located in...