The Estate Tax Window Is Closing

The rise of the gift tax exemption to its current levels has created an estate tax loophole. Now that the estate tax exemption is at $5 million and the federal gift tax is at $5 million, it is possible for taxpayers to avoid the state estate tax altogether.

To understand this current problem for states and this great opportunity for potential clients, it is important to understand the purpose of the gift tax. The IRS created the gift tax to prevent potential taxpayers from gifting their estate in anticipation of death. Taxpayers tried give their estates prior to death to prevent their estates from incurring a tax. With the gift tax in place, the IRS could now tax the entire estate regardless of whether the taxpayer gifted a portion of his estate prior to death. Currently, most states have set their respective state estate tax exemption at $1 million. With the current federal gift tax at $5 million, it is possible to  avoid state taxes.

States have tried to prevent these types of gifts with “gift-in-contemplation-of-death” laws. These laws try to deter the making of gifts that are made in contemplation of death by drawing the amount of the gift into the estate for tax purposes anyway. However, not all states have these types of rules. 

See Michael E. Kitces, How Soon Will States Close Their Estate Tax Loopholes?, Financial Planning, Apr. 30, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.