How Do I Cut the Inheritance Taxes for My Partner?
Answered by Shelley Meyers, chairwoman and chief executive officer of Meyers Capital Management, L.L.C., with help from Ari D. Spectorman, CFP, senior financial advisor for American Express. Nov. 27, 2000
Q: My partner of 25 years and I are professionals within a few years of retirement. For the last several months, we have been in the process of financial and estate planning. We live in Pennsylvania, where state inheritance taxes are 12 percent for non-blood relatives, and are seriously thinking of relocating to a state with more favorable state inheritance taxes for those who are not legally related. We also are interested in obtaining information on various state requirements for residency. Would you know of any resources that we could access for this information?
Thanks,
Micheline
A: Dear Micheline,
Actually, it's a little worse than you said: Pennsylvania inheritance tax for non-blood relatives is not 12 percent but 15 percent. But I've never known someone to move residency based on this one aspect of the big picture. Remember, these state inheritance taxes can be relatively small compared to potential federal estate taxes and "income with respect to decedent" taxes (i.e., taxes due on IRAs, employer retirement plans, annuities, etc.) depending, of course, on your situation.
Regarding residency requirements, this can be a complex area. If you maintain Pennsylvania property at all, that property will be taxed at Pennsylvania rates. The federal government and three states currently tax the estate before it is distributed. Those states are New York, Ohio, and Oklahoma. Thirteen states tax the estate after it is distributed, often at different rates depending on the family relationship that the beneficiary had with the deceased. They are: Connecticut, Indiana, Iowa, Kentucky, Louisiana, Maryland, Montana, Nebraska, New Hampshire, New Jersey, Pennsylvania, South Dakota and Tennessee.
While I do not know your personal situation, most of my domestic partner clients cross-own permanent life insurance policies on each other's lives so that they will have the cash needed to pay inheritance and estate taxes. These policies fall outside the estate and thus don't create any additional taxes for the survivor. The death benefit of these life insurance policies needs to be based on a calculation of total estate, inheritance and "income with respect to decedent" taxes (see above). Cross-ownership of policies is a viable alternative to a costly irrevocable life insurance trust.
Placing assets directly in a trust to avoid potential taxes involves irrevocable trusts, which, by definition, reduce your control and benefit from these assets. The issues and methods to be used to achieve your goals can be complex and must be explored thoroughly before executing a trust. Please seek professional guidance.
As for resources for more information on state inheritance tax laws: Quicken.com has an excellent database with links for more information.
Sincerely,
Shelley Meyers
Meyers is chairwoman and chief executive officer of Meyers Capital Management, L.L.C., with help from Ari D. Spectorman, CFP, senior financial advisor for American Express. Spectorman is based in Doylestown, Pa.
Nov. 27, 2000