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Solving the Estate Tax Puzzle


After changes to federal estate tax rules, states wrote statutes with lower exemption amounts to make up for budget shortfalls. Estate planning should now focus on both to avoid or lessen tax hits.

When the Bush administration changed the rules on federal estate taxes, the exemption amount was gradually ratcheted up from $675,000 to the current $3.5 million. At the same time, the tax rate on estates that were over the exemption threshold fell from 50% to 45%. Good news for taxpayers, but bad news for many state budgets. Under the old law, the federal government gave taxpayers an estate-tax credit equal to the amount paid in estate taxes to the state. When this credit was repealed under the new estate-tax law, many states faced a revenue shortfall.

As a result, several states wrote estate-tax statutes that were no longer in lockstep with the federal law. Most of the new state laws came with lower exemption amounts, usually $1 million to $2 million. New Jersey and Rhode Island, however, clung to the old $675,000 exemption and Ohio went even lower, to $338,333 (for a complete rundown of all kinds of state taxes, go to www.retirementliving.com/RLtaxes.html). The result for many taxpayers is that estate planning that focuses just on the federal law could leave heirs open to hefty state estate taxes. A knowledgeable estate planner, however, may be able to help avoid or lessen the tax hit.

The federal estate tax was scheduled to disappear next year, only to make a comeback in 2011 with an exemption threshold of $1 million and a tax rate of 55%. Most political pundits predict, however, that the Obama administration and Congress will extend the estate tax through 2010, with the exemption amount and the tax rate frozen at the current levels. What happens after that may depend on the size of the federal deficit.

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Victor J. Dzau, MD, gives expert advice
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