Q. How to avoid state estate tax?
A. Congress has kept Uncle Sam's inflation-adjusted estate exemption above $5 million per individual ($10 million per married couple), this effectively excludes most Americans from the federal levy, but nineteen states and the District of Columbia levy an estate with smaller amount of exemptions.
For example, 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.
The Strategies
There are a host of strategies and vehicles to avoid or mitigate federal and/or state estate taxes.
a. 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.
b. 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?
c. 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.
A. Congress has kept Uncle Sam's inflation-adjusted estate exemption above $5 million per individual ($10 million per married couple), this effectively excludes most Americans from the federal levy, but nineteen states and the District of Columbia levy an estate with smaller amount of exemptions.
For example, 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.
The Strategies
There are a host of strategies and vehicles to avoid or mitigate federal and/or state estate taxes.
a. 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.
b. 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?
c. 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.
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