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Estate Tax Increases and Decreases

Last update on: Jun 17 2020
estate planning

Federal estate taxes took a big slide on Jan. 1, 2004, making state death taxes a more important consideration of Estate Planning for many people.

The amount exempt from the federal estate tax jumped to $1.5 million for 2004 and 2005, up from $1 million in 2003. In addition, the top estate tax rate dropped to 48% from 49%. The next decline will be in 2006, when the exemption becomes $2 million. The tax rate will drop 1% in each of the next three years.

These estate tax changes should trigger several actions:

  • Be sure your will incorporates the new exemption. Some older wills state an exact amount for the exemption and must be updated whenever the law changes.Many wills automatically put the full exempt amount into a credit shelter trust or give it directly to heirs. This could leave your surviving spouse with insufficient assets as the exemption rises.To avoid impoverishing your spouse, put a limiting clause in your will. This clause might say that the federal exempt amount goes into a credit shelter trust unless the exemption exceeds a certain amount or a stated percentage of your estate. This limit ensures your spouse won’t be left with a minority of your estate unless that is what you intended.

    Other details for revising your will and estate planning to comply with current law are in the Estate Watch section of the web site Archive.


  • Consider state death taxes. About half the states do not have their own death taxes follow the decline in federal estate taxes. More states might follow suit as they decide they want to keep the revenue. The details vary from state to state. Some states even preserve the pre-2001 law, imposing taxes when the estate exceeds $675,000 (New Jersey, Wisconsin, and Rhode Island).Because state death taxes now might be higher than federal estate taxes, state tax planning should be part of every estate planning strategy. 
  • Moving to a no-death-tax state is the obvious solution. States with no estate taxes that are likely to remain that way are Florida, California, and Nevada. But look at more than death taxes. California has high income taxes that might not make the move worth while. If you choose to move, you really have to move. Spend at least half your time in that state each year. A checklist for establishing your residence is on our web site.
  • Shifting assets out of your name might be a solution. Suppose you own real estate in a high death tax state. Regardless of your state of residence, your estate must open the probate process in that state and pay the local death taxes on the real estate. That cost and inconvenience can be avoided by putting the real estate into a trust, limited liability company, or corporation. Then, the real estate is no longer in your estate.



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