It's easy to get overly complacent on the issue of estate and inheritance taxes.
Thanks to inflation, the federal estate tax exemption for 2012 is up-to $5.12 million for 2012 from $5 million in 2011, and that exclusion is portable between spouses. In other words, the unused portion of a person's exemption can pass to a spouse, making for as much as a $10.24 million estate tax exemption for subsequent heirs in 2012.
In many states, though, death taxes are a completely different ball game. The laws keep changing. Ohio has repealed its state estate tax for those dying on or after January 1, 2013. But at least 22 states and the District of Columbia still report some form of death taxes, according to information by McGuireWoods LLP, a Richmond, Va.-based law firm. So estates of clients with assets totaling more than $5.12 million, depending on where they live, risk owing combined state and federal death-related taxes as high as 50%.
But those combined taxes could get worse if Congress fails to act by 2013 and Uncle Sam returns to a 55% estate tax bite with an exclusion of only $1 million-up from the current 35%.
Meanwhile, death taxes are a flashpoint as states desperate for revenue come up against an anti-tax political climate.
The state death taxes have dealt a surprise dose of financial pain to those already dealing with the emotional anguish of losing family members. The heirs of wealthy Connecticut real estate developer Monty Blakeman, who died last April, were among those blindsided by state death taxes. Eleven days after Blakeman's death, Connecticut lowered its estate tax exemption threshold from $3.5 million to $2 million as part of its budget bill, and made the change retroactive to January 1, 2011. This reportedly saddled Blakeman's estate with an extra $100,000 in taxes the family did not anticipate. Blakeman's executrix Susan Coyle filed suit against the Connecticut Commissioner of Revenue Services in Superior Court, Milford, Conn.
Blakeman family attorney Stephen Bellis, of New Haven, Conn., contends the retroactive law is an "unconstitutional taking." The state has argued that retroactive taxes are common and have been upheld in prior court decisions.
Apart from Connecticut and Ohio, the Federation of Tax Administrators in Washington, D.C., says there was little earth-shattering reform in state death taxes in 2011. However, that's not to say the situation couldn't change fast if the economy fails to rebound or tax conservatives win 2012 elections.
"Somebody raised a question in Indiana about eliminating the inheritance tax," notes Verenda Smith, the FTA's senior manager of administration and policy.
Nevertheless, warns Danielle Mayoras, a Troy, Mich.-based legacy expert attorney and co-author of the book Trial & Heirs: Famous Fortune Fights, there is a lot more talk about trying to raise revenue through the states. "Now is a critical time for financial advisors to advise clients to meet with an estate planning attorney to find out what state [death tax] exemptions are," she says. "Illinois had an exemption of $2 million in 2009. They removed it in 2010 and brought it back in 2011."