brown on green, A Regular column about finances

by David Brown

Death Taxes

It used to be said the only two things you cannot escape are death and taxes. Unfortunately, for some even death will not stop taxes. Federal estate tax law has been all over the place for the last few years. In 2005 estates were taxable if they exceeded $1.5 million but by 2009 taxable estates had to exceed $3.5 million with the top tax rates ranging from 45% to 47%.

Then in 2010 the estate tax went away completely. Congress is still struggling to find a permanent solution but a patch has been put in place for 2011 and 2012 making $5 million the threshold for taxable estates with the top tax rate being set at 35%.

For many years most state death taxes were tied to the Federal estate tax laws, but with all the constant change of the last few years many states uncoupled their state death tax from the federal and set their own rates and taxable thresholds. Unfortunately many of the states have set the taxable estate amounts considerably lower than the Federal which means people may find their estates escaping federal estate tax only to be hit by their own state death tax.

Estates exceeding $1 million are taxable in 11 states. The top tax rate for state tax is considerably less than the federal rate but several states do have a top rate of 16% with three states ranging from 18-20%. The worst double whammy is in New Jersey with estates larger than $675,000 being taxable and the top rate at 16%. Ohio has the lowest taxable estate threshold at $338,333. However Ohio’s top tax rate is a relatively low 7%.

Many people in the middle class may find that their estate is taxable for state death taxes. It is reasonable to expect that many will have retirement accounts alone that will push their estates into taxable territory. What should you do if your estate exceeds your state death tax threshold?

First you should consult with a local attorney. You could relocate to a state that has no death tax. In some cases a married couple can split their estate so that each portion will be under the minimum taxable estate. You can make charitable bequests from your estate to reduce the taxable amount. You may be able to systematically transfer small portions of your estate to your heirs by using the annual gift tax exclusion currently at $13,000 a year.

Everyone will face death but with careful planning can escape state death taxes by being aware of the law in your state.

About the Writer: David Brown became director of the Free Will Baptist Foundation in 2007. Send your questions to David at david@nafwb.org. To learn how the Foundation can help you become a more effective giver, call 877-336-7575.