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Law Offices of Ronald W. Rutz
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March 8, 2006: State and Federal Death Taxes

Q: What do you mean my estate has to pay death taxes? My taxable net worth is well below two million dollars.

A: In planning estates, most people focus upon the Federal tax exemption and are confident about the lack of any other death tax exposure. This feeling has been reinforced in Colorado because the "other death tax" (the Colorado estate tax) parallels the Federal law.

But that is not true in all states. Thirteen states impose their own tax at a lower threshold then the current Federal exemption of $2,000,000, a few as low as $100,000. In 2009 when the exemption rises to $3,500,000, even more states will tax estates. Also the taxing philosophy varies from state to state—some tax the deceased’s estate such as Colorado and the Federal Government, while other states have an inheritance tax, imposing a levy on the inheritor, not the estate, thus making this entire matter very murky and frustrating.

For Colorado domiciliaries (people with their "legal" home in Colorado), assets wherever located are governed by and taxed by Colorado, except that is for real estate.

Thus, for example, although planning eliminated Colorado and Federal exposure, a Coloradoan owning real estate in states such as Nebraska, Kansas, and Oklahoma, where there is state tax exposure that begins under the $2,000,000 exemption, needs to realize that state estate or inheritance taxes may need to be paid.

Therefore it is important for anyone owning real property in more than one state to have competent estate planning help. And remember, a Revocable Living Trust by itself will not help either.

Another oversight that many "death to death tax" types miss is that if the federal government leaves or reduces its presence in this tax arena, many states are posed to step in and harvest this cash crop. Once it is clear what the Federal law will be, expect states to react according.

So are there solutions? Absolutely! Devices such as partnerships, limited liability companies, etc., can be used depending upon the states involved. Another sure fire way to escape death taxes would be to move to a state that has and never will have either an estate or an inheritance tax and do not own any real property in states that do or might in the future.

Thus, death taxes may very well become a lot like rhubarb—almost impossible to kill. When I was on the farm, we would run over it with tractors, turn the weed burner on it, even try to plow it up. Yet it would pop up healthier and more vigorous than ever. So if Congress ever succeeds in truly eliminating estate taxes, you may see death taxes popping up all over just like rhubarb.

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