Help clients steer clear of estate tax traps
Do your clients have assets in more than one state? Sometimes that can lead to unexpected — and costly — results when clients you would not expect to have any estate tax liability, based on federal exemption thresholds, suddenly do — and it’s too late to do anything about it.
It’s natural to focus on federal estate tax, which currently doesn’t impact estates with up to $5.43 million per individual, and allows couples to avoid tax on estates up to double that amount, i.e., $10.86 million.
“Many states don’t tax estates, and others do but peg their exemption amount to the federal exemption level,” said Chad Smith, a wealth management strategist at HD Vest Financial Services.
Then there are the states that not only tax estates, but with exemption thresholds below the federal one, Smith warned. Those doing so for 2015, according to a compilation by the McGuire Woods law firm, are Connecticut ($2 million exemption), the District of Columbia ($1 million), Illinois ($4 million), Maine ($2 million), Maryland ($1.5 million), Massachusetts ($1 million), Minnesota ($1.2 million), New Jersey ($675,000), New York ($3,125,000 April through March 2016), Oregon ($1 million), Rhode Island ($1.5 million), Tennessee ($5 million, but being eliminated in 2016), Vermont ($2.75 million), and Washington ($2,054,000).
Another helpful source of state estate tax information, according to Smith, is an annual feature in Forbes of the best places not to die. (The latest edition is online here.)
This means that estates of clients with assets held only in one state are vulnerable. For example, the estate of a married Maryland resident who dies in 2015 with $4 million in assets, without a credit shelter trust, could take a state estate tax hit. (Credit shelter trusts enable surviving spouses to maximize the combined credit against estate taxes accorded to both members of a married couple.)
ESTATE TAX GOTCHA
Chances are, however, that you are aware of your local state’s estate tax laws. But here’s a scenario that could more easily trap the unwary: Suppose you and your client live in Texas. You think your client has no federal or state estate tax worries. But then she dies and you discover that she owns land or real estate in Minnesota.
Since the property cannot, by its very nature, be domiciled anywhere but Minnesota, that state, with its low $1.2 million exemption threshold, might be able to give your client’s estate an unexpected tax bite.
Other situations can be less straightforward, and require your vigilance, Smith cautioned. Suppose, for example, your client lived and worked in New Jersey all his life, then retired and bought a home in Florida. He and his wife spend most of their time there, but also a lot of time in New Jersey as well to be close to children and grandchildren, and financial statements are mailed to their New Jersey home address.
“It is not inconceivable that a high-tax state like New Jersey might assert that, upon your client’s death, the investment account is domiciled there and subject to New Jersey estate tax,” Smith said.
It’s not enough simply to declare one’s state of residence. For example, Florida law (Statute Section 196.015) lists the following ten factors it uses when evaluating someone’s “permanent” residency status:
- Formal declaration of residency (declaration of domicile);
- Your designated mailing address;
- Informal statements regarding residency;
- Your place of employment;
- Termination of your previous residency in another state or country;
- Registration to vote in Florida;
- A Florida driver’s license;
- Florida license tags on all of your vehicles;
- Using a Florida address on your federal income tax forms; and/or,
- Previously filed Florida intangible tax returns.
The bottom line: Be sure to know whether your clients have any out-of-state assets that you might not be aware of, and ensure that your client’s estate plan is written to take that, and their own state’s estate tax laws, into consideration.
HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.
The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services® or its subsidiaries.
HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.
Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.