Approximately 15 states have their own state estate taxes. Many of these states have exemption amounts that are less than the federal applicable exclusion amount. For example, the District of Columbia and Maryland have exemption amounts of $1 million, and New York has an exemption amount of $2,062,500. This means that estate plans for clients domiciled in such states or with real property located in such states will need to take state estate taxes into consideration. The portability election can impact this planning.
Most married couples prefer to not pay any estate tax at the death of the first spouse to die (“First Spouse”). As a result, most estate plans are designed to avoid the imposition of any estate tax at the First Spouse’s death. Since the traditional formula clause that funds a credit shelter trust to the maximum amount of the federal applicable exclusion amount would trigger state estate tax upon the death of the First Spouse, the estate plans that use such formula clauses are typically modified to avoid the state estate tax if the couple is domiciled in a state with state estate tax.
Portability Plans Vs. Credit Shelter Plans Round 3: State Estate Taxes