NEW YORK (MainStreet) — Changes in estate taxation on the state level will increasingly impact estate planning in 2015.
“While federal estate tax laws now have some permanence, some state laws continue to change and estate planners have to take into consideration state tax issues when planning,” said Larry Gore, president with Wilmington Trust’s Northeastern Division.
To be more competitive and attract residents, some states with separate estate taxes have been increasing the amount that is exempt from state estate taxes.
As a result of changes enacted in 2012, the state of Tennessee is phasing out its inheritance tax through 2015 when the exemption amount will be $5 million ending with full repeal in 2016.
And Maryland has increased the amount of money that is exempt from state level estate taxes to $1.5 million and will continue to increase the exemption annually until it becomes linked with the federal exemption amount in 2019, which is projected to be $5.9 million.
“It’s an extra element that you have to weave into the tapestry because you’re not only dealing with federal taxes but also state taxes,” said Sharon Klein, managing director of family office services and wealth strategies with Wilmington Trust.
In New York, where there are city taxes, the exemption amount increased from $1 million to $2,062,500 for those dying after April 1, 2014.
“The amount continues to increase annually until it reaches $5,250,000 on April 1, 2017 and is ultimately linked with the federal exemption amount in 2019,” Klein told MainStreet.
In New Jersey this year, there have been a number of bills introduced that would eliminate estate and inheritance taxes or increase exemption amounts but none have passed yet.
“Estate planning is more challenging now, because as tax regimes change, so do the planning strategies,” said Klein. “You have to maneuver around a changing environment to get the best results.”
When it comes to real estate and depreciated property, real estate owners are advised to take into account both capital gains and estates taxes.
“Property owners have to be cognizant of the capital gains tax and the income tax implications when dealing with real estate and not just have the knee jerk reaction of removing assets out of your estate to save on taxes,” Klein said. “You could end up with a big income tax problem when you have no basis, low basis or negative basis.”
A taxpayer has gains or losses on the difference between sales proceeds and tax basis. As a result, basis is important because it is the amount that won’t be subject to capital gains tax.
“A higher basis is an advantage,” said Carol G. Kroch, managing director with wealth and philanthropic planning at Wilmington Trust in Delaware. “When the basis of property has been decreased due to real estate depreciation, the amount of taxable gain on sale of the property will be greater.”
Wealthy individuals need to consider whether they want to save on estate taxes by giving an asset to an heir while they are alive or save on future capital gains taxes by keeping an asset in the estate and potentially subjecting it to estate taxation.
“State laws are changing, but so are the dynamics of families,” Gore told MainStreet. “Valuations change, success changes and investments change, so the process is forever dynamic whether it’s caused by the family or the taxing authorities.”
--Written by Juliette Fairley for MainStreet