State estate and gift tax provisions.

• Author: Peters, Daniel M.

An important element of minimizing the death tax burden involves pre-mortem planning. Federal estate tax planning, however, covers only part of the potential tax liability experienced at death. Each state imposes a death tax, and many of these taxes differ from the Federal transfer tax structure. Therefore, an effective estate plan must incorporate all of the relevant state tax provisions. (Note: The Federal unified tax system and the gift and death tax systems of the various states all allow for certain amounts to be transferred free of transfer tax; these nontaxable transfers are not considered in this discussion. Therefore, unless otherwise noted, all references to lifetime gifts or transfers at death are to taxable transfers, i.e., amounts transferred in excess of any applicable Federal or state tax exemptions.)

While state estate and gift taxes are a significant consideration in estate planning, they are not the only transfer costs that may be incurred as a result of lifetime or at-death transfers. Other such costs include sales/use taxes and other fees imposed by the various states associated with the transfer of title to property. Such additional costs are beyond the scope of this discussion, but should be considered in estate planning.

State Death Tax Systems

There are three basic state death tax systems currently in use: piggy-back, estate and inheritance. Thirty-one states have adopted the so-called "piggy-back" death tax method Under this method, the state assesses a tax equal to the maximum allowable state tax credit on the Federal estate tax return. The maximum state tax credit is progressive and effectively ranges from 0.8% on taxable estates in excess of $100,000 to 16% for taxable estates in excess of $11 million.

Example 1: A decedent from a piggy-back state leaves a net taxable estate of $1,000,000. The tentative Federal estate tax is $345,800, minus the Federal estate tax transfer credit of $192,800, for a net tax of $153,000. To calculate the maximum allowable state death tax credit, the $1,000,000 net taxable estate is reduced by $60,000 (Sec. 2011) to $940,000. From the state tax credit table (Sec. 2011), the allowable credit on $940,000 is $33,200 [calculated as $27,600 on the first $840,000 plus $5,600 (5.6% of the $100,000 excess over $840,000)]. The resulting Federal estate tax inability is $119,800 ($153,000 -- $33,200). A piggy-back state would assess a tax on the decedent's estate of $33,200. As a result, there is no net increase in the decedent's overall tax burden.

Four states (Mississippi, New York, Ohio and Oklahoma) use an estate death tax system, which is a levy on the right to transfer property imposed on the decedent's estate. Fifteen states (Delaware, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, Pennsylvania, South Dakota end Tennessee) impose an inheritance tax system, which is a...