The Wall Street Journal
Weekend Investor – October 26, 2013
States You Shouldn’t Be Caught Dead In
With the U.S. federal estate-tax issue settled-at least for now- investors need to contend with growing state estate and inheritance taxes. Here’s what you need to know
By Laura Saunders
Expanded federal estate-tax benefits can also complicate planning for state levies.
Here is what taxpayers navigating this maze need to know:
Don’t get burned by changing rules.
Consider making gifts.
Be careful with out-of-state property.
Moving to another state? Do it right.
Nineteen states and the District of Columbia, home to just over one-third of the U.S. population, levy an estate tax on the assets of people who die or an inheritance tax on heirs receiving assets. Maryland and New Jersey have both, although each allows offsets to prevent double taxation.
In January, Congress voted to keep Uncle Sam’s inflation-adjusted estate exemption above $5 million per individual ($10 million per married couple). The change excluded almost all Americans from the federal levy, so state-level taxes loom larger by contrast. (This year, the federal exemption is $5.25 million.)
Many states also have far smaller exemptions than Uncle Sam’s. The threshold is $1 million for estate taxes in Massachusetts, New York, Oregon and Minnesota, and just $675,000 in New Jersey. Pennsylvania’s and Iowa’s inheritance taxes have no exemption in some cases.
Comments October 26, 2013
Fortunately, there are a host of strategies and vehicles to avoid or mitigate federal and/or state estate taxes. Section 529 of the Internal Revenue Code provides for an often overlooked estate planning vehicle designed to protect assets away from estate taxes over multiple generations and can act like an education endowment.
Grantor retained annuity trusts (GRATs) allow for the transfer of large amounts of wealth at a significant gift tax discount. Since their structure is based on interest rates (the lower, the better) when the GRAT is established, today’s low interest rate environment makes this vehicle particularly appealing. The current administration is very interested in eliminating or curtailing the use of GRATs. Maybe they feel GRATs legally provide too many estate planning advantages. Who knows how along before they limit the future use of GRATS?
Life insurance provides a means of creating leverage on wealth. For example, a consumer could pay a $2,000 annual premium and receive a $1,000,000 death benefit. Life insurance has preferential tax treatment, since beneficiaries receive the death benefit tax free. Unfortunately, death benefits are included in the owner’s estate and are subject to estate taxes. Fortunately, if the owner of the policy is an irrevocable life insurance trust (ILIT), the death benefits can be exempt from estate taxes. Just because the current administration has discussed limitations on life insurance policies less frequently than limitations on GRATs, each has valuable merits that should be evaluated.
Work closely with a privately owned Register Investment Adviser (RIA) that is legally obligated to act in your best interest before any other party, including shareholders, to review your estate plan.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.