Death & Taxes: State Tax Considerations for 2016 Estate Tax Planning


In the 21st Century, large federal estate exemption amounts and portability have changed the estate planning game, which is further complicated by state tax laws, according to a Dec. 1 PricewaterhouseCoopers call on tax and wealth management issues in the new year. 

“State issues are going to be the ones that throw kind of a wrench into the works again” Evelyn Capassakis, a tax partner at PricewaterhouseCoopers in New York said. 

Fewer individuals are now utilizing the typical estate plan of the 20th Century, which consisted of a credit shelter trust, use of the unlimited marital deduction and a life insurance trust.  With the 2015 annual exclusion amounts at $5.43 million for an individual and $10.85 million for a married couple, the classic estate plan is not “relevant for the modest couple, or the modest family,” Capassakis said on the PwC call.  

For those with modest estates, the standard techniques may not be practical.  Capassakis used a couple with a $7 million estate for illustration.  In 2016, $5.45 million goes into a credit shelter trust with the remainder going to the surviving spouse.  From a non-tax perspective, putting the bulk of the estate in a credit shelter trust may not be ideal.  However, for ultra-high net worth individuals, these estate planning methods are still relevant, she noted. 

A credit shelter trust may still be needed to take advantage of state thresholds, she said.  States often have a lower exclusion amount than the federal exclusion.  For example, both Maryland and Rhode Island have an estate tax exclusion of $1.5 million in 2015.

“From a tax perspective, the more relevant issue nowadays seems to be the income tax because of portability,” Capassakis said.  With portability, a surviving spouse can use the unused portion of the first spouse-to-die’s estate and gift tax exemption amount.  An estate that elects portability will get a step-up basis in assets at the death of the first spouse and at the death of the surviving spouse.  In the credit shelter trust scenario, there is a step-up in basis only on the death of the first spouse.  Depending on the facts and circumstances, a portability election can be used to minimize income taxes on the sale of appreciated assets.   

“State rules don’t necessarily follow the federal rule,” she stated.  Capassakis highlighted that not all states have portability, so practitioners should consider the state tax consequences.  Hawaii is a state that conforms to federal portability, while New York does not. 

“It used to be you’d have checks and balances with perhaps two or three trustees, all of who have the same powers; now you have potentially different people serving different roles,” Capassakis also noted.  For example, in Delaware, a trust can have an administrative trustee who simply holds assets.  Others roles, depending on the state, include a distribution trustee who decides which beneficiaries receive assets, an investment advisor who makes investment decisions and a trust protector who removes and replaces trustees.   

For more information on the PWC call, see Diane Freda’s Daily Tax Report article

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn:  What other state tax considerations should be taken into account when doing estate planning for clients?   

For more information about estate taxes, check out Bloomberg BNA’s Estate, Gifts and Trust Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today. 

By:  Genie Nguyen 

Follow Genie on Twitter at:  gNguyen_SALT

Follow BBNA on Twitter at: @BBNATax