I Don’t Have an Estate Tax Problem — Do I?

A few months back I wrote about how estates up to $3,500,000 are not subject to federal estate tax and that the tax will be eliminated in 2010. For this reason, when people call our office to discuss estate planning they will often begin by saying that they are not concerned about estate tax. I have to correct them, however, because most states have their own estate tax that may kick in on smaller estates where the federal tax isnât a concern. So, how big might such an estate tax bill be?

First, a little background. Under the previous law, Congress permitted a dollar for dollar credit towards the federal estate tax for any state estate and inheritance taxes paid up to a certain limit. So, many states established their estate tax structures to âsoak upâ the maximum credit that Congress permitted. In essence, the federal government shared a portion of its tax revenue with the states. When it raised the federal exemption, however, Congress decided it could no longer share a smaller tax revenue with the states so it phased out this credit. Many states, in response, changed their tax laws to preserve their revenue stream. New Jersey now has an estate tax that kicks in on estates greater than $675,000 and New York on estates greater than $1,000,000.

New Jerseyâs estate tax starts out at 4% and gradually increases to a maximum of 16%. New Yorkâs estate tax also maxes out at 16%. As I explain to our clients, we usually see federal estate taxes in the six figure to seven figure range and state estate taxes in the tens of thousands of dollars on the low end, and hundreds of thousands of dollars on the higher end.

What can you do to reduce, or even eliminate this tax? Well, for starters, in the case of married couples, a bypass or credit shelter trust should be employed. This will save substantial amounts of tax that would be paid by children at the death of the second parent to die. But you must have this trust set forth in your will before you pass away.

What if that opportunity has already passed? Purchasing life insurance to pay the tax is another solution, which may be especially desirable where the estate consists of real estate that the family doesnât want to sell just to pay the tax. And, placing that insurance in a life insurance trust is usually a good idea. Otherwise, you end up paying estate tax on the life insurance that you bought to pay the tax in the first place.