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Thursday, April 19 News

Wealth Watch / Remember the state in estate taxes

After nearly 10 years of uncertainty regarding federal estate taxes, Congress finally removed the guesswork in late 2012 by passing permanent tax reform. The estate and gift tax exemption was raised to $5 million and indexed, the tax rate was capped at 40 percent and portability of the exemption between spouses was made permanent.

While this meant that with minimal planning a married couple could avoid federal tax on an estate of $10 million, it left unanswered many questions regarding state estate tax.

Admittedly, state estate taxes rarely approach the punishing levels associated with federal estate taxes.

The top marginal state rate is around 16 percent, while the federal rate is 40 percent. And families have a simple solution: Tthey can move to a lower tax state. However, absent a well-timed move, considerable state estate tax can be due, and planning ahead can save families sizeable dollars.

We cannot cover all 50 states in a brief article; instead, we highlight Connecticut and New York.


In 2011, the Nutmeg State changed its estate tax system and adopted a $2 million exemption, but like other states, did not allow portability. As a consequence, married couples who have not done some estate planning and leave everything to each other will lose the use of the first $2 million exemption, costing the estate roughly $150,000. Tax rates range from 7.2 percent at $2M to 12 percent for estates over $10 million.

Connecticut is also one of only a couple of states with a gift tax. Residents cannot avoid state estate tax by giving assets away prior to death (unless they are assets outside the state or under the $14,000 annual exclusion amount).

New York

The Empire State is the most recent state to enact sweeping tax changes. The new law will phase in exemptions over the next five years. The exemption began at $2,062,500 on April 1, then rises each year to $5,250,000 by April 1, 2017, and ultimately will match the federal exemption by Jan. 1, 2019. The top rate remains unchanged at 16 percent. The new system has an added twist; if the estate exceeds the exemption by 5 percent, New York taxes the entire estate as if there were no exemption at all. For residents with estates over $2 million, it is imperative to use the exemption effectively. In addition, New York implemented new rules on gifts -- there is now a three-year look-back.


Many estate planners advise married couples to use flexible disclaimer strategies to allow survivors to assess the tax environment and their needs at the time of the first death. The survivor disclaims property from the decedent's estate into a trust, which avoids tax at the second death and qualifies for the use of the state exemption at the first death. For example, in Connecticut, a survivor might disclaim $2 million to capture the exemption at the first death. In New York, the disclaimer amount would change as the new exemption amounts are phased in. These trusts are called bypass trusts, credit shelter trusts or family trusts and generally provide income for the surviving spouse.

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If you live in a state with recent tax reform, or if your estate documents are more than 5 years old, it might be a good time to have them reviewed. The good news is that exemptions are up, and a little planning can go a long way to saving tax dollars.

Robin Sherwood is a certified financial planner and principal with HTG Investment Advisors Inc., an independent fee-only advisory firm in New Canaan. For information, call 203-972-8262 or visit www.htginvestmentadvisors.com.