• Under the 2017 tax reform, the federal estate tax applies to fewer estates.
  • More than a dozen states have estate or inheritance taxes.
  • Gift and tax strategies may help investors mitigate state tax liabilities.

With the unified federal gift and estate tax lifetime exemption now totaling more than $11 million, it is expected that federal estate tax will apply to fewer than 2,000 families each year.

With these high exemption levels in place, investors can shift the bulk of their efforts away from avoiding federal gift and estate taxes to other planning tasks. Instead, for example, they can devote more time to making sure key documents are in place and up to date.

However, in some states, estate and inheritance taxes remain a chief concern for investors.

Many states have reduced or eliminated estate taxes over the past couple of years. But other states may be moving in a different direction. For example, the California state legislature is considering a bill to tax estates over $3.5 million. If passed, the bill would send the measure to voters to decide.

There are additional, related taxes in other states.

  • Six states impose inheritance taxes (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania)
  • Connecticut also has a state gift tax

Planning considerations

There are several considerations for investors who live in states that have these taxes.

  • Have a plan in place to create liquidity for settling estate or inheritance taxes due to the state. Life insurance can help to create liquidity at death.
  • Consider establishing a credit shelter trust. Trust planning or tilting of assets may be helpful to utilizing the state level exemption at the death of a spouse. In certain cases, the lack of such planning may result in a loss of that individual’s exemption at death.
  • Gift assets while living. Most of the states mentioned above tax an estate at death but do not impose a gift tax on lifetime transfers.
  • Relocate to a state that does not impose any state taxes on gifts or estates. Careful planning is needed to meet requirements when legally changing and establishing residency, because rules vary by state.

Review estate plans

Estate planning remains critical as investors seek to manage the distribution of assets as well as meet any state tax requirements. It’s important for investors to meet with a financial advisor to develop an estate plan and conduct regular reviews and updates.


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