Estate tax article

hoffse · January 2016

This is an interesting (short) article on state-level estate taxes. This is something that most people don't even know exists. Some folks get caught when their estates are too low to have federal estate tax consequences, but they are actually higher than the state estate tax exemption. This article is a little bit out of date, but still some good reading.

FWIW, if I lived in New Jersey, I would move.

http://taxfoundation.org/blog/does-your-state-have-estate-or-inheritance-tax

smerka · January 2016

Estate tax isn't the only reason I would leave New Jersey.

Xstatic3333 · January 2016

That is interesting. I absolutely had no idea, and the two states I have interests in are both on the lower side. This explains why my grandma started giving away money to the yearly gift tax limit while she was still with us (she lived in MA).

hoffse · January 2016

smerka said:

Estate tax isn't the only reason I would leave New Jersey.

Lol I wasn't going to say it, but...

hoffse · January 2016

Washington state is pretty crazy too, and the exemption really isn't all that high.

JoanE2012 · January 2016

Hey now, Jersey here! LOL. Actually, I'd move too - the only thing keeping me here is all of my family.

CuriousKiddosMama · January 2016

I didn't even know this existed! But then I guess I've never lived in a state with an estate tax. Wow, NJ is really bad!

HoneyBee973 · January 2016

JoanE2012 said:

Hey now, Jersey here! LOL. Actually, I'd move too - the only thing keeping me here is all of my family.

I'm from NJ also ... but I don't mind living here

vlagrl29 · January 2016

I was thinking I'd never heard of an estate tax and I've personally closed 2 estates. I clicked the link and it shows our state doesn't participate - yea!

jessica490 · January 2016

Ah...good ole' CT is on that map....why would I think any different?? LOL

jtmh2012 · January 2016

Honestly, I'm surprised Virginia isn't. They seem to tax anything and everything.

brij2006 · January 2016

This is interesting.

I believe the last statement, completely.

"Estate and inheritance taxes have large compliance costs, have been shown to suppress entrepreneurship, and are among the most harmful taxes to economic growth."

brij2006 · January 2016

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

maple2 · January 2016

It's funny to me that so many people are surprised these exist. I've never lived in any other kind of state, so I'm surprised to find there are states where they don't exist (and that they are actually the majority).

hoffse · January 2016

brij2006 said:

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

jtmh2012 · January 2016

hoffse said:

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

I'm not sure if this is in your are or if you're even allowed to comment, but since it's somewhat related, I'll ask here. Given we live in a state where this isn't an issue, at what point do you recommend people look into living revocable trusts or do you?

I ask because we've received totally different answers on them. One from the law office my mom works at (they did our power of attorneys) who said they weren't worth it. The other from our financial advisor who while they don't do it directly, said they could put us in touch with people who did if we were interested.

I know at a minimum we need a will especially since we have a child in the picture.

Thoughts? Not legal advice I know.

brij2006 · January 2016

hoffse said:

brij2006 said:

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

So many people also don't take into account life insurance either. If it's paid to an estate or trust, then it can bump you above that as well. Which is very likely if there are children under 18.

Xstatic3333 · January 2016

brij2006 said:

hoffse said:

brij2006 said:

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

So many people also don't take into account life insurance either. If it's paid to an estate or trust, then it can bump you above that as well. Which is very likely if there are children under 18.

Really? Yikes. I always thought life insurance was tax free. So tax would come right out of the estate meant for a minor child/otherwise dependent person?

brij2006 · January 2016

Xstatic3333 said:

hoffse said:

brij2006 said:

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

So many people also don't take into account life insurance either. If it's paid to an estate or trust, then it can bump you above that as well. Which is very likely if there are children under 18.
Really? Yikes. I always thought life insurance was tax free. So tax would come right out of the estate meant for a minor child/otherwise dependent person?

Life insurance is tax free. However, if it's paid into an estate in a state that taxes estates, then it would be taxed. For us, we live in Illinois and the tax starts with estates at $4mil. So if your net worth was $3mil and you had a $1mil life insurance policy that pays to the estate upon your death, then it would bump over the $4mil tax amount and the entire estate would be taxed.

AprilZ81 · January 2016

I really, really hate our tax code.

Why some states and our federal government think that they can tax our income, our investments and everything else while we are living and then turn around and tax it AGAIN just because someone died and chose leave some money to someone else is just so freakin' wrong. You (the government) already got more than your fair share, no need to be even more greedy.

The sad thing is the truly wealthy people know how to arrange their assets to avoid/minimize inheritance taxes. It is the "millionaire next door" type of people who end up getting penalized.

I've mentioned this to my parents (I'm not sure about their total asset value) about making sure that their estate is arranged to minimize any tax liability. I will be the executor of their estate and while Ohio doesn't have an inheritance tax that could change at any time.

brij2006 · January 2016

AprilZ81 said:

I really, really hate our tax code.

Why some states and our federal government think that they can tax our income, our investments and everything else while we are living and then turn around and tax it AGAIN just because someone died and chose leave some money to someone else is just so freakin' wrong. You (the government) already got more than your fair share, no need to be even more greedy.

AGREE!!!!

I completely understand taxing things that were untaxed beforehand. So any 401k's and any other pre-tax investments. But to turn around and tax anything someone leaves for their heirs, just because they actually saved money and thought of their heirs? Just wrong.

My conservative side is going to come out. This is where I get so angered at politicians who preach taxing "the millionaires." Hello, someone who has put money away every month from the minute they start their full-time job, until retirement, is most likely a millionaire. Then if they leave that money that THEY worked for, to their children or other heirs, why should it be taxed heavily?

hoffse · January 2016

jtmh2012 said:

hoffse said:

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

I'm not sure if this is in your are or if you're even allowed to comment, but since it's somewhat related, I'll ask here. Given we live in a state where this isn't an issue, at what point do you recommend people look into living revocable trusts or do you?

I ask because we've received totally different answers on them. One from the law office my mom works at (they did our power of attorneys) who said they weren't worth it. The other from our financial advisor who while they don't do it directly, said they could put us in touch with people who did if we were interested.

I know at a minimum we need a will especially since we have a child in the picture.

Thoughts? Not legal advice I know.

I think it depends on what you need them for. Revocable trusts can be revoked/changed in your lifetime, so if you are on the fence about who needs a trust or you think that somebody needs a funded trust now but might not in the future, they can be useful for that.

That said, I rarely do them unless you're talking about super high net worth.

Really, the kind of planning you need depends on 1) what your goals are and 2) what kind of assets you think you will have at death. Many times the trust(s) you need post-death can be set up in your will, so that they just spring into being upon death.

A few examples of situations I frequently see:

1) A couple expects to have collective assets over the federal exemption amount for one person - which in 2016 is $5.25M. The federal exemption is actually "portable" between spouses. That means the surviving spouse gets to use the exemption from the first spouse. That effectively doubles the exemption to $10.9M for all assets combined, once the second spouse dies. However, your wills need something like a credit shelter trust for it to happen that way.

Of course, that exemption is so high that many couples fall under it right now. My only caveat to this is that it can always change because the estate tax exemption is a huge political issue. If Congress drops it back down to $1M per person, suddenly a lot more couples get caught in this situation. So the estate tax exemption is something to watch from year to year, if not plan for outright.

2) A couple is planning for minor children, and they don't know if their kids will be responsible with money or not. I frequently see trusts being used to dole out money to children over time so they don't get it all at once. Typically it's tied to a certain age. So you might have Suzy getting 1/3 of the principal at age 25, 1/3 and at 35, and the remainder at age 45. This is something H and I will do for our own kids, at least until we see that they can be responsible with a large inheritance.

3) A couple expects to have lopsided assets. For example, the wife might have the expectation of an inheritance, while the husband does not. If significant assets are in one name and the spouses want to keep it that way after death, then trusts may be useful. Or you might have to work around lopsided assets when the assets of just one spouse throws the entire couple into situation 1 above.

4) And my favorite... trusts to plan around family dysfunction, or in same cases to create additional dysfunction. You often get this with second or third spouses, kids from a prior marriage, spouse 1 trying to fully disinherit spouse 2 (which can only happen in GA last time I checked).... It can get crazy.

**not legal advice, just general considerations.

hoffse · January 2016

AprilZ81 said: I really, really hate our tax code.
Why some states and our federal government think that they can tax our income, our investments and everything else while we are living and then turn around and tax it AGAIN just because someone died and chose leave some money to someone else is just so freakin' wrong. You (the government) already got more than your fair share, no need to be even more greedy.
The sad thing is the truly wealthy people know how to arrange their assets to avoid/minimize inheritance taxes. It is the "millionaire next door" type of people who end up getting penalized.
I've mentioned this to my parents (I'm not sure about their total asset value) about making sure that their estate is arranged to minimize any tax liability. I will be the executor of their estate and while Ohio doesn't have an inheritance tax that could change at any time.

This is true. The people who get caught are the ones who are millionaires because 1) they saved paycheck to paycheck their whole lives and 2) they are too cheap to get an estate plan put together, because spending money on legal fees goes against their frugal nature. A lot of people fall into that category.

Really complex plans can get expensive, sure. But the only people who need those are the ultra wealthy who are going to be taxed out the bejeezes anyway, so paying $20K for a comprehensive estate plan is a deal.

For most people, a good will, a medical directive, making sure beneficiaries are correct on accounts, and a basic understanding of what is included in an estate and what is not is all you need. That should be less than the cost of cheap vacation.

smerka · January 2016

I totally get what you guys are saying about the government taxing estates twice but I don't know how true it is. Let's pretend your brokerage account has 5 million dollars in it when you die. And your estate will be taxed. You put in 1 million and then it grew to 5 million. You were not taxed on the gains in that account during your life time. You would pay taxes if you pulled money out. So 4 million of that money has never been taxed (I am not counting dividends). The same thing happens with land or real estate. When property values go up, you don't pay income taxes on the gain until you sell and realize the gain. Hopefully that makes sense.

brij2006 · January 2016

hoffse said:

AprilZ81 said:

I really, really hate our tax code.

Why some states and our federal government think that they can tax our income, our investments and everything else while we are living and then turn around and tax it AGAIN just because someone died and chose leave some money to someone else is just so freakin' wrong. You (the government) already got more than your fair share, no need to be even more greedy.

The sad thing is the truly wealthy people know how to arrange their assets to avoid/minimize inheritance taxes. It is the "millionaire next door" type of people who end up getting penalized.

I've mentioned this to my parents (I'm not sure about their total asset value) about making sure that their estate is arranged to minimize any tax liability. I will be the executor of their estate and while Ohio doesn't have an inheritance tax that could change at any time.

This is true. The people who get caught are the ones who are millionaires because 1) they saved paycheck to paycheck their whole lives and 2) they are too cheap to get an estate plan put together, because spending money on legal fees goes against their frugal nature. A lot of people fall into that category.

Really complex plans can get expensive, sure. But the only people who need those are the ultra wealthy who are going to be taxed out the bejeezes anyway, so paying $20K for a comprehensive estate plan is a deal.

For most people, a good will, a medical directive, making sure beneficiaries are correct on accounts, and a basic understanding of what is included in an estate and what is not is all you need. That should be less than the cost of cheap vacation.

*****Formatting sucks!*****

This is so very true. My parents' assets are more than the federal estate tax minimum. So we know for a fact that their estate will be taxed heavily upon their death. It wasn't until my brothers' death last year and them needing to re-do their will to no longer include him, that they finally set themselves up properly.
I had to sit down with my dad and the lawyer and we both had to explain to him that I would need to sell 1/4 of the family farm in order to just pay the taxes on their entire estate. Before this, their will was the one they wrote up in 1989 before he was even farming. He just never thought it was a need to make sure he protected his assets this much. My how he views it differently now, but unless people have already dealt with it with a death in the family, many don't view it necessary.

hoffse · January 2016

smerka said:

I totally get what you guys are saying about the government taxing estates twice but I don't know how true it is. Let's pretend your brokerage account has 5 million dollars in it when you die. And your estate will be taxed. You put in 1 million and then it grew to 5 million. You were not taxed on the gains in that account during your life time. You would pay taxes if you pulled money out. So 4 million of that money has never been taxed (I am not counting dividends). The same thing happens with land or real estate. When property values go up, you don't pay income taxes on the gain until you sell and realize the gain. Hopefully that makes sense.

Yes and no. Stock is funky because heirs get a stepped up basis for when they sell it. That's a huge tax savings from an income tax standpoint.

But from the estate tax standpoint, the entire value of the stock is included in your gross estate, not just the gain. So that original contribution will get caught up as part of the calculation, and it could be taxed twice if your other assets push it that high.

Also, the estate tax rates are different (and usually higher) than the capital gains rates. They are also higher than paying penalties on certain tax-advantaged accounts like 529s. I have had clients funnel assets into 529s with the intention that their heirs take a penalty on it, because that works out to be less than the estate tax.

The whole thing gets really complex, and it's hard to compare apples to apples. You want to minimize your tax liability across all scenarios if possible.

My frustration stems from the fact that a lot of people just don't even think about it. It's appalling how many people just bury their head in the sand about it.

Xstatic3333 · January 2016

brij2006 said:

Xstatic3333 said:

brij2006 said:

hoffse said:

brij2006 said:

We're in Illinois, so the tax starts when the estate is at $4mil. Thankfully there's a way to help get around it a bit until each spouse is worth $4mil.

Yep. Planning around them so that married couples can double up on the exemption is usually fairly straight-forward, but people have to know to do it. In states where the exemption is significantly lower than the federal exemption, a lot of people think they don't have to worry about it. They'll be like, "Oh we'll only have a couple million. We're good." And then they live in a state where the exemption is only $1M per person.

So many people also don't take into account life insurance either. If it's paid to an estate or trust, then it can bump you above that as well. Which is very likely if there are children under 18.

Really? Yikes. I always thought life insurance was tax free. So tax would come right out of the estate meant for a minor child/otherwise dependent person?

Life insurance is tax free. However, if it's paid into an estate in a state that taxes estates, then it would be taxed. For us, we live in Illinois and the tax starts with estates at $4mil. So if your net worth was $3mil and you had a $1mil life insurance policy that pays to the estate upon your death, then it would bump over the $4mil tax amount and the entire estate would be taxed.

Thank you for explaining. I didn't really know much about the estate tax until I came to this board. I always figured it was something that would never affect me or anyone else in my life, but I've definitely learned that that may not be the case. In fact I hope it won't be, since of course I'd like to leave something for my heirs, and it certainly affects plenty of hardworking "regular people". It does seem to be a popular cause lately. I actually got into a spirited debate about it with my dad the other day, with him being a major proponent even though I wouldn't be surprised to hear that my parents' estate is ultimately affected.

jtmh2012 · January 2016

brij2006 said:

My how he views it differently now, but unless people have already dealt with it with a death in the family, many don't view it necessary.

I just shake my head looking at my parents. They've dealt with 3 out of 4 of my grandparents dying and are convinced they're not leaving enough behind to worry about doing anything with it. Hell, so far as I know, their will still says that my brother and I are supposed to go live with my deceased grandparents.

You know, I don't care if I get anything or not when it's all said and done, but I just hate seeing unwise decisions made and the govt getting more than they need to.

hoffse · January 2016

The issue about guardianship for minor children is a really big deal too. Obviously there are two sides to it - the care side and the financial side. Unfortunately, some people are not equipped to handle your kids' money if you die.

My parents' will originally stipulated that if they died, my guardian would be an uncle, and he would also manage my money until I reached a certain age. Well when my grandparents died and their estate got distributed, my parents discovered that this same uncle was so much greedier than anybody previously knew, and they revised their wills so that I would go to somebody else for guardianship. My mom says the thought of him being in charge of my finances as a minor still haunts her, even though I'm well past that age.

TBH, I think institutional trustees for kids' money is really the way to go. It's more expensive, but you have the benefit of it being arms-length, and you know that nothing shady will happen to the money. Every penny is accounted for. H and I have some friends that we might trust to do it right, but I don't know if we would trust any family members other than my parents, and they are older.

brij2006 · January 2016

@jtmh2012 It really took a lot to get my dad to realize how much of a need this was. He still isn't fully on board with all of it, but the lawyer pretty much didn't give him an option to do it any other way and I wasn't letting him hold off on it any longer.

For me, I think I wouldn't view it of as big of a deal if they just had cash assets. But they have farm land and equipment. So I would have to sell things and not be able to continue some of the farm operation in the meantime, just to pay the government their share. If we're mid season, that can be a major clusterf*ck just to get the crops planted or harvested. So I flat out asked him which piece of land he wants the government to own when he dies? He didn't find that as funny, but it got him realizing a little more that it would make a big mess for me.

He also really hates how the government has their hands into everything. So that helped a bit as well. ;-)

brij2006 · January 2016

hoffse said:

The issue about guardianship for minor children is a really big deal too. Obviously there are two sides to it - the care side and the financial side. Unfortunately, some people are not equipped to handle your kids' money if you die.

My parents' will originally stipulated that if they died, my guardian would be an uncle, and he would also manage my money until I reached a certain age. Well when my grandparents died and their estate got distributed, my parents discovered that this same uncle was so much greedier than anybody previously knew, and they revised their wills so that I would go to somebody else for guardianship. My mom says the thought of him being in charge of my finances as a minor still haunts her, even though I'm well past that age.

TBH, I think institutional trustees for kids' money is really the way to go. It's more expensive, but you have the benefit of it being arms-length, and you know that nothing shady will happen to the money. Every penny is accounted for. H and I have some friends that we might trust to do it right, but I don't know if we would trust any family members other than my parents, and they are older.

We actually have it set that our friends who live DR's principals right along side us and our bank, are the ones to manage DD's trust. So any decisions our friends make, they also have to have approved with the bank as well.

We're probably crazy, but we have an additional trust set up for FIL's portion if both us and DD were to pass away. It's very clearly stated and laid out how much money he receives and when. It's also clearly laid out what he has to do with his own finances within 5 years in order to receive his portion of inheritance. He is very bad with money and it was very hard for us to even put him in our will at all.

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