State Death Taxes and the Best Way to Pay Them

Daniel B. Evans (Attorney at Law, Consultant to Leimberg & LeClair, Inc.) has recently published his article entitled Paying State Death Taxes from the Marital Share, Prob. & Prop., Sept./Oct. 2007, at 54.

Here is the conclusion to his article:

As a general rule, it would seem to be better to direct that all state death taxes be paid from the marital share of the estate rather than from the credit shelter trust even though it may result in more state death tax.

            The direction will not result in any federal estate tax because the estate will get a deduction regardless of whether the money goes to the surviving spouse or to state death taxes.

            If there is no state death tax, or the state allows a state-specific QTIP (or QTIP-like) election for the credit shelter trust, there will be little or no state death tax, and the direction to pay state death taxes from the marital share will be irrelevant.

            If during estate planning (or during post-mortem planning) the decision is made to create a credit shelter trust to save possible future federal estate tax even though it will result in some state death tax, then paying the state death tax from the marital share also should be the correct decision because the additional state death tax will be relatively small compared to the resulting increase in the credit shelter trust.

            Because most estate plans now direct that state death taxes should be paid from the credit shelter part of the estate, this means that most of us must go back to the old drafting table to rewrite our marital deduction formulas and tax clauses.