What a difference an election
cycle makes. Investors can rest uneasy that the federal estate tax-free year of
2010 will prove an anomaly, and return with a vengeance in 2011. But while
Congress and the White House bide their time over whether or not to raise the $1
million exemption set to reappear in four years, state legislators across the
country continue to debate local "death" taxes. State estate taxes often prove
windfalls for treasuries across the country.
Consider Susan Buffett’s estate, which closed in February.
Beyond the $2.62 billion she left to charity when she died in July 2004, she
also bequeathed an estate of $59 million to family and friends. Her final death
tax bill? $110.4 million to federal, state and countygovernments.
How’s that? Buffett’s assets were tied up in stock in Berkshire Hathaway. The estate sold the shares to fulfill the bequests, then sold more
shares to pay property taxes. Following that, the capital gains also became
subject to additional taxes, for which the estate had to sell even more
stock—subject, of course, to taxes.
Of the total taxes on the estate, $75.5 million went to the
federal government, $29.7 million to the state of Nebraska and $5.2 million to
Douglas County. In an average year, Nebraska collects roughly $20 million in
inheritance taxes. Buffett’s death helped swell the 2005 total to $64.1 million.
These potential windfalls spur many states to impose their own estate or
inheritance taxes. The unsubtle difference between the two types of levies is
that one is imposed on an estate itself, the other charged to its beneficiaries
at rates that vary according to their relationship to the deceased.
"Lawmakers are addicted to the revenue," says Curtis Dubay, an
economist at the Tax Foundation, a Washington, D.C., think tank. "They don’t
want to see a source fall to the wayside. It’s an easy source of revenue,
because you can claim it only hits the rich, so it’s politically expedient."
Across the country, state death taxes typically run from 5
percent up to 19 percent of all assets beyond the usual exemptions, generally $1
million or $2 million. The current federal estate tax sits at 45 percent through
2009, and will revert to 55 percent in 2011.
Today 27 states impose no death taxes. Taxpayers may assume
that a Democratic majority in the state legislature will lead to added levies,
but this assumption may be invalid. For the foreseeable future, certainly well
past 2011, any state is apt to scramble to gain revenue lost since 2001, when
the Economic Growth and Tax Relief Reconciliation Act began phasing out the
state credit that estate-tax payers could write off on their federal returns.
(This came to be known as the "pick-up tax.") The credit meant that estate-tax
payers paid the federal rate and the state received a share of it. In 2005, the
IRS changed the state credit into a deduction; it is scheduled to last until
2010, and revert back to a credit in 2011.
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