DISPARITY BETWEEN STATE AND FEDERAL ESTATE TAX EXEMPTIONS RISE

Effects Of Decoupling Increases In Many States

The disparity between the federal and state death tax exemptions has increased substantially, causing significant exposure to state death taxes where no federal death tax otherwise exists. In states such as Massachusetts, New Jersey, New York, Connecticut and others, the potential negative impact caused by states who have decoupled from the federal exemption scheme has grown greater. With the federal estate tax exemption in 2009 at $3.5 million, and the state tax exemption in New Jersey, for example, at only $675,000, the potential cost of fully utilizing the federal exemption is $229,200 of state tax. The benefit of full use of the federal estate tax exemption for a married couple and incurring this $229,200 cost on the death of the first spouse, however, is less tax on the surviving spouse’s estate, at possibly a much later date. Therefore, a time value of money analysis is generally undertaken to determine whether to incur the state tax prematurely in order to preserve the full federal exemption, or to waste a portion of the federal exemption in order to avoid the premature payment of state death taxes. Employing the use of QTIP trusts within estate plans can provide flexibility in many cases so that different courses can be taken by election based upon the facts and circumstances existing at that time.