Vol. 6, No. 4, Pg. 34. Drafting and Payment Considerations Under the South Carolina Estate Tax.

• Author: By Louis S. Harrison and John M. Janiga

South Carolina Lawyer

1995.

Vol. 6, No. 4, Pg. 34.

Drafting and Payment Considerations Under the South Carolina Estate Tax

34Drafting and Payment Considerations Under the South Carolina Estate TaxBy Louis S. Harrison and John M. JanigaThe South Carolina estate tax, S.C. Code Ann. § 12-16-10 et seq, imposes a tax on the transfer of the estate of both residents and nonresidents. Id., § 12-16-510, 520. (The South Carolina Estate Tax Act also imposes a tax on the transfer of the estate of aliens and includes a generation-skipping transfer tax. This article does not address these issues.) On its face, the tax appears straightforward and, in effect, represents a relatively fair death tax approach. Nevertheless, it contains unexpected nuances.

This article initially provides an overview of South Carolina estate tax mechanics. Then, it examines the need for sensitivity to the tax in drafting estate planning documents and paying the tax due.

How the South Carolina Estate Tax Works

The key feature of the South Carolina estate tax is that it is determined by reference to Internal Revenue Code (Code) § 2011. That section provides a credit in determining federal estate tax due for "the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia, in respect of any property included in the gross estate . . ." Code § 2011(a).

Importantly, the credit will be allowed only to a specified limit, and then only to the extent that South Carolina estate tax has actually been paid. The starting point for computing the limit is the "taxable estate," which is the federal gross estate minus allowable deductions. From the taxable estate, $60,000 is then deducted to arrive at the "adjusted taxable estate." Finally, based on this amount, the table set forth in Code § 2011(b) is used to arrive at what is known as the "maximum credit amount" allowed.

The following schedule illustrates the computation of the maximum state death tax credit amount under Code § 2011(b) (note: the taxable estate amount is assumed):

Taxable estate $2,100,000

Reduction amount 60,000

= Adjusted taxable estate $2,040,000

Maximum credit amount based on table (which appears on page 36) in Code § 2011(b): $ 106,800 If the decedent was a resident of South Carolina at the time of death, the South Carolina estate tax would equal the maximum state death tax credit allowable but reduced by the lesser of:

1. The amount of the estate tax paid to any other state and credited against the federal estate tax, or 2. the amount of the death tax credit multiplied by a fraction, the numerator of which is the value of the property having a tax situs outside of South Carolina and the denominator of which is the value of the decedent's gross estate. Id., § 12-16-510.

If the decedent was not a resident of South Carolina at time of death, the South Carolina estate tax would equal the maximum state death tax credit allowable multiplied by a fraction, the numerator of which is the value of the property having a tax situs in South Carolina and the denominator of which is the value of the decedent's gross estate. Id., § 1216-520.

Drafting Estate Planning Documents Based on the South Carolina Estate Tax

One objective of estate planning is to reduce a married couple's overall exposure to federal and state death taxes. Given this objective, estate planners have developed

35drafting strategies based on the state death tax credit. These strategies revolve around the interplay between state death taxes and credit shelter/ marital deduction formulae.

Credit Shelter/Marital Deduction Formulae. Credit shelter/ marital deduction formulae provide the vehicle by which estate planners can implement a married couple's objective of minimizing death taxes. The formulae represent the critical aspect of a tax minimization plan which examines the death taxes which will be due at two future points in time, initially at the first spouse's death and subsequently at the surviving spouse's death.

In the majority of situations, the plan includes consideration of a federal estate tax credit known as the "unified credit," and the marital deduction. The unified credit of $192,800, Code § 2010(a), effectively shields transfers on up to $600,000 from federal estate tax; the marital deduction allows a decedent to transfer an unlimited amount of property to a surviving spouse free of federal estate tax. Code § 2056(a).

The typical plan focuses on eliminating federal estate tax at the first spouse's death by: (1) carving out of such decedent's estate a "credit shelter share" to take advantage of the unified credit, and (2) leaving the remaining share of the estate to the decedent's surviving spouse to qualify for the marital deduction.

Thus, the critical aspect for successful implementation of a tax minimization plan focuses on the credit shelter share and the formula used to determine it established under the estate planning documents. It is the formula which determines the amount of property which will pass to the credit shelter share.

Thus, the critical aspect for successful implementation of a tax minimization plan focuses on the credit shelter share and the formula used to determine it established under the estate planning documents.

Significantly, although the unified credit effectively shields transfers of up to $600,000 from federal estate tax, that does not mean that the credit shelter share formula should be drafted to automatically equal $600,000. Rather, the credit shelter share formula has to take into...