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GETTING PERSONAL: Pay Attention To State Estate Taxes Too


June 22, 2006

Read Time

3 minutes


By Tara Siegel Bernard
A Dow Jones Newswires Column

NEW YORK (Dow Jones) -Wealthy families need to be sure they're planning around state estate taxes, especially if the compromise to cut federal estate taxes is passed in its current form.

That's because a provision in The Permanent Estate Tax Relief Act of 2006 – which was approved by the House Thursday and could next week reach the Senate where support is still uncertain – would eliminate the state estate tax deduction set against their federal estate tax bills.

The bill, sponsored by House Ways and Means Chairman Bill Thomas, R-Calif., would also boost an individual's estate tax exemption to $5 million from $2 million – that translates into $10 million for couples, up from $4 million now. Estates between $5 million and $25 million would pay capital gains tax rates, currently 15%, while estates greater than $25 million would pay twice the capital gains rate, or 30%. Currently, taxable estates are taxed at a maximum 46% rate.

"This will make state estate taxes much more of a significant concern and it will also highlight the differences among the states," says Robert Alan Romanoff, partner and head of the asset planning and preservation group at Chicago law firm Levenfeld Pearlstein LLC. "There are some circumstances where the state estate tax might be higher than the federal estate tax," he adds, pointing to Illinois, where the state estate tax is 16%, which would be one percentage point higher than proposed federal level for estates between $5 million and $25 million.

Tax differences among the states have become more pronounced in recent years. Indeed, in light of federal tax-law changes made in 2001, about 18 states and Washington, D.C., have started to impose their own estate tax on top of the federal estate tax. And in some states, the state estate tax exemption is much lower than the federal exemption, meaning that some people could be hit with state estate taxes even if they escape the federal levy. For instance, while the federal exemption stands at $2 million today, it's only $675,000 in New Jersey. In New York, the state exemption stands at $1 million and the tax rate ranges from 6.4% to a whopping 16%.

"There is already a lot of pressure just to change residency based on the (varying levels of) income tax (imposed) by states," says Don Weigandt, a managing director at the J.P. Morgan Private Bank in Los Angeles. "The pressure for people to migrate to lower tax or no tax states will grow and states will feel the pinch or rich people wanting to move out."

Some states are especially attractive because they don't impose state estate – or state income – taxes; they include Florida, Nevada, Texas, Alaska, New Hampshire, South Dakota and Wyoming.

The bottom line, financial advisers say, is that many individuals are not even aware there is a state estate tax, and the loss of the deduction will underscore its impact, which requires careful planning.

"It is another factor people will have to consider and plan around," adds Holly Isdale, head of the wealth advisory group at Lehman Brothers Holding Inc. (LEH).

(Tara Siegel Bernard is one of five Getting Personal columnists who write about personal-finance issues ranging from new tax proposals to education-funding strategies to estate planning.)


Filed under: Trusts & Estates

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