Estate Taxes – One Nation Under Federal Estate Tax; How about Your State?
Sep 02, 2014
The Federal Government has an estate tax, which the entire country is subject to. Additionally, certain states have their own state estate tax. Is yours included?
Estate tax is a familiar topic of mine, and for good reason. Farm estate and business planning includes developing a plan for assets that are generally extremely valuable. Moreover, the value of these assets generally rest in equity, less liquidity. Land is a perfect example.
The federal government has long had an estate tax law. It has changed significantly through the years. Currently, it is set "permanently" at $5,000,000 per person, and indexed for inflation. What that means is that for people dying in 2014, the exemption – indexed for inflation – is $5,340,000. Anything above that exemption will be taxed at 35%. As discussed earlier, this law is "permanent"; meaning it will not automatically expire, like previous estate tax laws (recall the "fiscal cliff" scare December of 2012.) However, it can be changed if Congress decides to change it.
For many farmers, there is also a state estate tax that is in effect; meaning that their state they live in or own real property in may have its own state estate tax that is decoupled from the federal estate tax. For example, Minnesota has a state estate tax. Basically, if you live in Minnesota and you have a net worth that exceeds $1.2 million, your estate would be subject to state estate taxes regardless of whether you are subject to the federal estate tax. Other states have similar laws. The point here is to make sure you work with your professionals to build the best possible defense against an estate tax that allows for you to protect as much as you possibly can of your estate from both state and federal estate taxes, depending on the state you live in. This is a very important component of your planning as the tax rates for taxable estates are very high and can put large hindrances on the future of family farm operations.
In the next post I will examine the effect of state estate tax, compared to federal estate tax, exemplified by an analysis of two decedents with the exact same balance sheet, one living in a state with state estate tax (Minnesota is the subject state), and one living in a state without state estate tax.