As a result of all these complexities, it is possible in many states that a decedents estate could be distributed to beneficiaries free from federal estate tax, but be subject to state estate or inheritance tax. For example, Massachusetts, New Jersey, New York, and Oregon have estate tax exemption amounts of $1 million. So a resident of one of those states who died in 2011with a taxable estate of $3.5 million would escape any federal estate tax (because the taxable estate is under the federal $5 million exemption amount for 2011), but would have $2.5 million of his or her estate subject to state estate tax ($3.5 million taxable estate minus the $1 million state exemption amount).
Taxpayers sometimes have their estate plans drafted to leave the portion of their estate that can pass free of federal estate tax to children or other non-charitable beneficiaries with the balance to pass to one or more public charities, or to a private foundation created by the taxpayers. By doing so, all federal estate tax is avoided and taxes that would have otherwise been paid to the United States Treasury for estate taxes end up being paid to the charitable organizations. Of course, with differing amounts that can pass free of estate tax for federal and state purposes, the goal of paying no estate tax becomes much more difficult, if not impossible, to achieve. In addition, a move by the taxpayer from a state without estate taxes or with an estate tax tied to the federal estate tax exemption amount to a state with its own state estate tax system can destroy what would have otherwise been a perfectly planned strategy. Thus, a taxpayer who employs this type of charitable and estate planning strategy should revisit his or her plan with an estate planning attorney on a periodic basis to determine whether the plan still accomplishes what the client desires.
Consider the Wisconsin case of In re Estate of Zarobsky. In Zarobsky, Tillie Zahrobsky executed a codicil (amendment) to her Will in 2000 providing that, if her estate exceeded the amount that can pass free of federal estate tax, the surplus of her estate would be distributed to a local high school to which she had been a longtime donor. She desired the amount she left to the high school to be used for scholarships.At the time Tillie executed the codicil to her Will, Wisconsin had no separate inheritance or estate tax. The amount that could pass free of federal estate tax was $675,000, so the amount of her taxable estate over that amount would be distributed estate tax-free to the high school.
At Tillies death, the amount that could pass free of federal estate tax had risen to $1.5 million. However, Tillies estate was only $1 million at that time. In another twist, in the period between the execution of her codicil and her death, Wisconsin enacted its own state estate tax with a $675,000 state tax exemption amount. As a result of these changes in the law, none of Tillies estate was distributed to the high school. It is unknown from the facts whether that is what Tillie would have wanted or not.
The high school believed it was not Tillies desire that the high school receive nothing from her estate. The high school brought litigation to have the Will interpreted so the amount of its bequest should be measured by the new Wisconsin estate tax exemption amount of $675,000 and not the federal exemption amount of $1.5 million.
The Wisconsin Court of Appeals held that Tillie could not have intended that the state exemption amount was applicable, since it was nonexistent at the time Tillie executed the codicil to her Will. As such, Tillies gift to the high school failed. Unfortunately, we will never know if that is what Tillie really wanted!
Our law firm focuses its practice on estate planning and administration of trusts and estates, including lifetime and testamentary charitable planning strategies. As a member of the exclusive nationwide group of estate planning attorneys, the American Academy of Estate Planning Attorneys (http://www.aaepa.com), we are kept up-to-date of new tax developments as they occur and we receive continuing legal education regarding how to effectively plan for these law changes. You can take advantage of our specialized knowledge by scheduling a free consultation with one of our attorneys for yourself or one of your clients by calling or visiting our website.