Richard P. Breed, III is a shareholder and co-founder of Tarlow, Breed, Hart & Rodgers P.C. of Boston, which was established in 1991. He concentrates his practice in the field of estate and business planning and advises owners and their families on the complexities of estate planning and administration, taxation and corporate law. He can be reached at firstname.lastname@example.org.View all articles by Richard P. Breed III
As the federal estate tax exemption climbs and as the 2010 repeal approaches, many families and their advisors are relieved that $2 million to $7 million of assets can be inherited free of federal estate taxes. However, residents of most states must still plan for looming and often substantial, state death taxes.
In 2000, most states imposed an estate tax equal to the full amount of the state death tax credit allowed under section 2011 of the Internal Revenue Code. Their estate tax systems were "coupled" with the code and "picked-up" an estate tax to the extent of section 2011's credit allowance.
Until 2001, the typical estate plan of a married couple with a federal taxable estate called for the estate of the first deceased spouse to be divided into two shares. One share (the "credit shelter trust") would be funded with an amount equal to the applicable federal estate tax exemption. The rest would fund the "marital deduction trust," which qualified for the marital deduction, usually achieved by making a "QTIP election." As a result of this estate planning technique, both federal and state estate taxes would be deferred until the death of the surviving spouse.
A married resident of Maine (a "pickup" state) died in 2000 with a gross estate of $3 million. The decedent's revocable trust stipulated that his estate be divided into two shares: a credit shelter trust equal to the applicable federal estate tax exemption at the time of his death ($675,000) and a marital deduction trust equal to the rest of his estate ($2,325,000). This formula would result in no estate tax liability in the event of the first spouse's death and would fully "fund" his federal estate tax exemption.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), however, changed the federal estate tax system significantly: The applicable federal exemption was increased; the maximum federal estate tax rate was decreased; and the the state death tax credit under section 2011 was gradually phased out and replaced with a deduction under section 2058 for state estate taxes paid.
The repeal of the credit pulled the rug out from under the pickup states. They were left with two choices: Do nothing and allow the state's death tax to evaporate with the repeal of the section 2011 credit, or respond with legislation to "decouple" from the federal estate tax system. About one-third of the pickup states have eliminated their death taxes. Several others have separated entirely from the federal estate tax system and have enacted their own independent inheritance or estate tax. The remaining pickup states have "decoupled" from the federal estate tax, but are "coupled" with the pre-EGTRRA version of the code.
Most estate plans drafted before
2001 set out a maximum estate tax deferral based on a coupled
state-federal estate tax system. Such estate plans may no longer
provide the desired estate tax deferral because of the new state death
Say that a married New Jersey resident dies in 2008 with a gross estate of $3 million. His revocable trust directs his estate to be divided into two shares: The credit shelter trust would be funded with the applicable federal estate tax exemption ($2 million) and the marital deduction trust would be funded with the rest of the estate ($1 million). New Jersey decoupled in 2002 and limited its applicable exemption to $675,000. The estate tax liability would be $99,600.
Credit Shelter Trust Planning