Each state has its own estate planning rules, taxes and laws, so when mapping out your estate plan, it’s important to consider geography. State laws also vary regarding trusts, according to a recent USA Today article, “Why geography matters for your estate plan and your heirs.”
Two families with the exact same level of assets may face very different estate tax bills, even if the only difference between them is their states. Probate costs and speed also vary greatly by state, and this shapes how estate planning is done.
Everyone should know whether or not their state has state estate taxes and inheritance taxes. If you live in such a state, your heirs may receive a smaller inheritance than you intended. Estate taxes are levied on assets decedents own and are paid by the estate. Heirs pay an inheritance tax in five states.
Most Americans don’t get close to the $15 million-per-person federal estate tax threshold. However, twelve states and the District of Columbia still have their own state estate taxes at far lower levels. Oregon starts at $1 million and Massachusetts at $2 million. If you own a home in those states, your estate will likely need to pay taxes unless you plan properly.
Two states—New York and Illinois—have something special to watch for—the estate tax “cliff.” If any amount of the estate exceeds a specific and relatively low exemption threshold, the entire estate is taxable. It’s not just the excess amount, but the entire estate. A single dollar over the limit can cause the estate to owe hundreds of thousands of dollars in taxes. Estate planning with taxes in mind is critical to avoid falling off the estate tax cliff.
Here’s an example: Illinois doesn’t have a state tax for up to $4 million. However, if the estate is valued at $4,000,001—just one dollar over the exemption—a progressive tax rate ranging from 0.8% to 16% applies to the entire estate. An estate valued one dollar over the exemption equals a state estate tax bill of more than $220,000, compared with $0 in federal estate tax.
If an Illinois resident has a $15,000,001 estate, the state estate tax would be more than $1 million, while the federal estate tax would be a federal tax of 40 cents.
To avoid taxes and probate, many estate plans incorporate trusts. There are many different types of trusts. However, they mainly fall into two categories: revocable and irrevocable. Revocable trusts can be changed by the grantor; assets can be moved in and out of the trust, and beneficiaries may be changed at any time. Irrevocable trusts are difficult to change, as the name indicates, and provide more asset protection. The irrevocable trust removes assets from the estate and is its own legal entity.
California does not impose a state estate tax or inheritance tax, but residents still face important estate planning considerations. Probate can be a lengthy and expensive process, particularly for families who own real estate. While certain estates may qualify for simplified probate procedures, others may require formal court proceedings, resulting in additional legal fees, administrative costs, and delays in distributing assets to beneficiaries. A properly funded revocable living trust can help families avoid probate, maintain privacy, and provide a smoother transfer of assets to loved ones. For California homeowners, understanding how property ownership, trust funding, and applicable tax laws affect their estate plan is essential to protecting their assets and preserving their legacy.
Most people don’t know they don’t have to create a trust in the state where they live. States vary in asset protection, trust administration, state income tax benefits and the ability to create dynasty trusts that extend over multiple generations. Which state to have your trust based in depends upon the family’s asset level and complexity of the estate.
An estate planning attorney in your home state will help determine if your trust should be created in your own state or if the options offered in other states make more sense. It’s also important to revisit the trusts, just as you should review an estate plan every few years. New laws and changes to the family need to be reflected in the estate plan, including trusts.
Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. We help individuals and families establish living trusts, wills, powers of attorney, advance healthcare directives, and other essential estate planning documents designed to protect their loved ones and preserve their legacy. Schedule a quick and easy consultation with estate planning attorney Sedric E. Collins, Esq., or call 323-900-5450.
