With the federal exemption amount set at a fairly generous $5,250,000 for 2013, state specific estate planning can easily slip past a taxpayer’s radar unnoticed.  In light of the federal exemption, a married couple can potentially shelter a combined $10.5 million from federal estate taxes.   However, for married couples living in states with significantly lower exemption amounts than the federal, substantial state death taxes may be imposed if the full exclusion amount passes to a bypass or credit shelter trust. 

Many older estate tax planning strategies for married couples included the creation of trusts in order to take advantage of both the unlimited marital deduction and the taxpayer’s lifetime exemption amount.  In many cases, the funding of those trusts was tied to the federal exemption amount.    This can leave an executor with numerous, and potentially costly, decisions to make in order to minimize both federal and state estate taxes, especially when the couples’ estate tax planning strategies are out of date. 

Prior to the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many states tied their estate tax to the federal state death tax credit, often referred to as a “pick-up tax.”  These states imposed an estate tax equal to the federal state death tax credit.  A state death tax credit was available until 2005, when it was replaced with the federal state death tax deduction.  The state death tax deduction was made permanent with the passing of the American Taxpayer Relief Act of 2012 (ATRA).

Replacing the state death tax credit with a state death tax deduction effectively eliminated the estate tax in states with a “pick-up tax,” and a number of states “decoupled” from the federal estate tax enacting their own estate tax and inheritance tax regimes.  As a result, state estate and inheritance taxing regimes have been in a constant state of flux. 

Eleven states (Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, New Jersey, Rhode Island and Vermont) and the District of Columbia have some form of “pick-up” or modified “pick-up” tax still in effect.  Many of these states have significantly lower exemption amounts.

The New York State estate tax is frozen at the federal state death tax credit in effect on July 22, 1998.  The New York State exemption amount remains at $1,000,000, with a top tax rate of 16%.  A New York State resident decedent has a filing requirement for New York State Estate Tax purposes if their federal gross estate, plus federal adjusted taxable gifts and specific exemption, exceeds $1,000,000.

Among other significant tax-related provisions, the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (TRA 2010) enacted a new system of “portability” for federal gift and estate tax purposes.   Portability refers to the executor’s ability to irrevocably elect to transfer the deceased spouse’s unused exclusion (“DSUE”) amount to the surviving spouse. 

Generally, unless New York State law provides otherwise, when an estate tax return is filed for federal purposes, the amounts used to compute the gross estate and any elections reported on the federal return are binding for New York State estate tax purposes.  There are some notable exceptions for portability. 

The New York State Taxpayer Guidance Division has stated that the portability election for federal purposes is not allowed for New York State estate tax exemption purposes.  The unified credit for New York State is fixed at the amount allowable as if the federal applicable exclusion were $1 million. 

Without proper planning in “decoupled” states, a married couple relying solely on portability could lose the benefit of the first deceased spouse’s state exclusion/threshold amount.  Your resident state’s estate tax laws should be carefully reviewed to determine whether portability will be helpful or detrimental to your estate plan.  

Please contact your DB&B advisor to discuss all of your estate tax planning needs.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.