Jamie's Corner: State Estate Taxes in 2010

The federal estate tax's great hibernation of 2010 is having a significant impact on the estate taxes of certain states.  Indeed, state estate taxes that piggy-back the current federal estate tax are sleeping with it this year.  And in some states, whose estate taxes piggy-back earlier versions of the federal estate tax, 2010 has brought confusion and uncertainty.  But, of course, in other states, forethought from 2009 or earlier has prevented 2010 revenue loss and chaos.   

Residents of pure "piggy-back" states fortunate enough to die this year may have estates owing tax to neither the feds nor the state.   In fact, in many states (including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Michigan, Mississippi, Missouri, Montana, Nevada, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wyoming)[1], where tax liability is based on the federal estate tax credit allowable for state estate tax paid (pick-up taxes), there has been no state estate tax liability since 2005, when EGTRAA completed its phase-out of the state tax credit.[2]    And in Wisconsin, 2008 legislation tied its estate tax to the current federal credit - effectively eliminating it until January 1, 2011.[3] 

Illinois and North Carolina estate taxes both went on hiatus with the federal estate tax at the beginning of 2010.  In both of these states, the pick-up tax through 2009 was based on the 2001 federal credit amount.  As of January 1, 2010, the Illinois estate tax is based on the current federal credit, which is, of course, $0 until next year[4].  In North Carolina, however, the amount of the estate tax, when it returns with the federal estate tax in January, will still be based on the 2001 credit amount.[5] 

While Illinois and North Carolina taxes expired this year due to their interplays with federal estate tax, Kansas and Oklahoma estate taxes terminated at the beginning of 2010 as a result of state legislative action. 

            Meanwhile, some states acted early (shortly after EGTRAA) to decouple their estate tax systems from the current federal tax law (these include Maryland, New Jersey, and Washington D.C. amongst others). These states decoupled by fixing tax rates to the pre-EGTRAA federal credit amount. By decoupling, these states protected their revenue streams against Congressional upheaval and EGGTRA's state tax credit phase out.[6] 

In addition, since Maryland, New Jersey and D.C. have tied their state estate taxes to historic legislation, changes in the federal estate tax law for 2011 will have no direct impact on their respective tax laws or revenue streams.  For the tax weary, it's also worth pointing out that New Jersey and Maryland are the only two states that have both estate taxes and inheritance taxes.[7][8]  For its part, New Jersey has an exclusion amount of $675,000[9], whereas for Maryland and D.C. it is $1,000,000. 

However, not all states that have decoupled are enjoying estate tax certainty this year. In New York, for instance, the state estate tax is linked to pre-EGTRAA credit amounts.  However, the current law is still subject to ambiguity. As the law now stands, the New York exemption amount may be dependent on the existence of a current federal estate tax. 

Here's the reasoning: the current law, NY Tax § 951(a) states that "the unified credit against the estate tax . . . shall . . . be the amount . . . allowed . . . under the applicable federal law in effect on decedent's date of death."  The statute goes on to qualify this amount by saying "[p]rovided . . . the amount of such credit . . . shall not exceed the amount allowable as if the . . . unified credit did not exceed the tax due under [the IRC] on a federal taxable estate of one million dollars."  In other words, the statute defines the exemption amount as the current federal exemption amount, as long that doesn't exceed $1,000,000. And so, the argument goes, since there is no current federal exemption, there is no New York exemption.  This, of course, begs the question of whether this means there is no exemption this year - or no tax.[10]

Though the general consensus appears to be that there is, in fact, a current New York estate tax a $1,000,000 exemption amount,  the New York State Legislature, on January 19^th of this year, introduced an amendment to § 951 (Bill No.  A09710A, Part BB) clarifying the exclusion amount at one million dollars[11] retroactively to January 1^st, 2010[12].  The bill was sent to ways and means on February 17^th: updates will be posted here. 

In sum, state estate taxes have been affected to varying degrees by EGTRAA's sunset.  Likewise, Congress' estate tax action - or inaction - over the next year will have ripple effects throughout the states.