States breathe life into death tax

With the federal estate tax having lapsed — and with no sign that Congress is going to address the situation — the Virginia State Legislature is taking matters into its own hands.

The so-called death tax expired as of Jan. 1 but is slated to be reinstated in 2011 — at a rate of 55%.
That window means heirs who enter probate court due to a death this year escape a federal tax of up to 45% on estates valued at $3.5 million or more.
For years, legislators in Washington said they would make sure the estate tax law didn’t disappear by the end of last year. But with health care legislation taking center stage on Capitol Hill, they failed to deliver on that promise.
Now, state lawmakers in Virginia, as well as other states such as Georgia and Maryland, are looking to craft proposals to address the issue.
On Jan. 12, Virginia became the first state to introduce a bill that would require all estates and trusts to be treated as if it were 2009 — unless Congress acts. Specifically the bill, which was introduced in the House of Delegates on Jan 12 by William R. Janis (R-Va.), clarifies that all trusts and estates that use formula clauses tied to the applicable exclusion amount under estate tax law must make the same assumptions as 2009.
For example, one of the most common formulas used in estate tax law says that a deceased’s children can receive the largest amount possible without triggering federal estate taxes, and that the rest of the sum goes to the deceased’s spouse.
Under the old estate tax law, that meant the deceased could leave $3.5 million to children and the rest to a spouse. But without any federal estate tax law, it means that the sum would all go to the children and the spouse would receive nothing, said Howard Zaritsky, an estate planning attorney in Rapidan, Va., who drafted the bill.
Another common clause in wills and trusts says that a decedent’s children can receive “an amount equal to the decedent’s applicable exclusion amount,” which would have meant $3.5 million under the former law, Mr. Zaritsky said. Then the rest would go to the spouse. But without any estate tax law, that could be construed to mean that the children would receive nothing since there is no “applicable exclusion amount,” he said.
The point of the proposed bill is to carry out what the deceased’s intentions were, Mr. Zaritsky said and thus apply the caps that were in effect last year. “Our goal in the legislation is to provide some closure and a clear answer to what the deceased meant,” said Mr. Zaritsky. Such legislation could be particularly helpful for families who are in disagreement and where a death could result in litigation, he said.
The bill in the Virginia legislature is expected to pass by the end of February, Mr. Zaritsky said, adding that the goal is to make it retroactive to Jan. 1. If Congress does pass a law addressing the estate tax issue, that federal law will take precedence.
To read a more in-depth account of what states are doing to deal with the lapse in the estate tax, read the Feb. 1 issue of InvestmentNews.]