Some states are preparing to ease their inheritance taxes

Take the example of a couple in New York with $ 5 million in assets. They should not have any federal inheritance tax. But what they owe in New York would depend on their planning, said Ita M. Rahilly, partner at accounting firm Vanacore, DeBenedictus, DiGovanni & Weddell.

If each spouse had $ 2.5 million in their name, $ 1 million would go into a death credit shelter trust and the marginal estate tax rate on the remaining $ 1.5 million would be 8% , she said. If the spouse who died second had all of the $ 5 million to his name, this marginal rate would be 11.2% on the amount in excess of the exemption.

“It requires a complete overhaul,” Ms. Rahilly said.

One plus: People who purchased life insurance to cover federal property taxes could use this policy to pay state estate taxes.

Another option is to donate the money while you are alive. Only Connecticut and Minnesota have state gift taxes that are applied below the federal gift tax exemption, which is the same as the federal estate tax exemption. (This is separate from the annual exclusion of gifts of $ 14,000.) Some states, however, consider gifts made near death for inheritance tax purposes.

But when you give the heirs a gift of, say, valued stocks, you’re also giving them any unrealized gains that the stock made when you bought it – known as cost base. When they sell this giveaway, they will have to pay capital gains on it.

This is where people have to do a math. Depending on the recipient’s tax bracket, this rate could be lower than state estate tax or it could be much higher. (When a person dies, the cost base reverts to what it was on the date of death, called the gross-up base, and essentially wipes out any built-in gains.)

In Massachusetts, for example, anyone who received an asset with built-in gains and sold it would also be subject to the state’s 5% capital gains tax, which is in addition to federal rates. said Beth C. Gamel, Managing Director of Argent Wealth. Management. A person in the highest capital gains tax bracket and subject to 3.8% Medicare tax would pay 28.8% capital gains tax on that asset. The highest Massachusetts estate tax rate is 16 percent, with a $ 1 million exemption.

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