States are in Favor of the Estate Tax

As I stated in a previous post, I was at the Southern Federal Tax Institute in Atlanta last week, which has a wonderful two-day estate planning program.  There were many interesting things said, but one of the things that caught my attention the most related to the reinstatement of the federal estate tax in 2011.

Prior to the Bush tax cuts, the federal estate tax code allowed each decedent a "state death tax credit," which was a credit against the decedent's federal estate tax liability.  The purpose of the credit was to give taxpayers a credit for any amounts paid in state death taxes.  (Although this was the purpose, the state death tax credit was a specific formula provided in the tax code and was not actually related in any real way to the amount of state death tax a decedent actually paid.)

Most states had a death tax (or inheritance tax or estate tax, etc.) equal to the state federal death tax credit.  Accordingly, the state death tax credit really just provided the states with some of the federal estate tax revenue, and did not actually reduce the total estate tax owed by a decedent.  For example, let's assume that a decedent owed $100 in federal estate taxes, not including the state death tax credit, and was entitled to a $20 state death tax credit.  Without the state death credit, the decedent would owe $100 to the IRS.  With the state death tax credit, the decedent would $80 to the IRS and $20 to the state where she died.  So, in both scenarios, the decedent was out $100.  The only thing that changed was where it went.

When the Bush tax cuts came in, the state death tax credit was repealed.  This meant that the death tax revenue for many states went away as well.  If the estate tax is reinstated next year as currently scheduled, the state death tax credit comes back too, which means that many states will start receiving estate tax revenue again.

I have always known that the return of the estate tax would benefit many states, but what I did not realize, and learned at SFTI, is that many states are actually lobbying Congress to allow reinstatement of the estate tax as currently scheduled.