The odds of a majority of Americans who will pay federal estate taxes are slim, because the vast majority of Americans don’t have millions in assets. State estate taxes are usually another matter, though – unless you live in a state that’s repealed those taxes.
The good news is the Ohio estate tax was officially repealed in January, 2013. Governor John Kasich signed into law the provision in the summer of 2011 as part of the state’s total annual budget. You may recall the 7 percent estate tax that was tacked onto those families with assets that totaled $338,333. It was one of the lowest rates in the U.S and it also spelled trouble for some Ohio farm families.
But that was only the tip of the iceberg. At one point, Congress considered kicking the federal estate tax back down to just a $1 million exemption; however, the American Taxpayer Relief Act of 2012 served as the ideal stumbling block for the tax man and provided collective sigh of relief throughout the country.
What does all of this mean and specifically, what does it mean to those families who are farmers?
Federal Estate Tax
The 2014 exemption from federal estate taxes is $5.34 million — and double that for married couples.
The concern, not only in Ohio but around the country, was the $5.34 million federal exemption that could have dropped significantly to $1 million. When the details of the law emerged, minus that drop to $1 million, there was a single word built into the text: “permanent”. This means Congress intended to keep what it had put into place.
Another element of the law is the ease of transfers of the unused exemptions to a surviving spouse. As with most laws, there are a few caveats, including a 9 month time frame for the estate to file the deceased’s estate tax returns. Once that red tape is sorted, whatever remaining exemption there is will be transferred to the surviving spouse.
Remember, though, despite the win for preventing the drop, there was a trade off. The tax rate for amounts in excess of $5.34 million increased from 35% to 40%. Even that had a silver lining: the final numbers were a compromise with those who wanted a whopping 55% increase.
Need perspective? Consider our neighbors in the northeast. The exemption level for those residing in New Jersey is a mere $675,000 with state tax rates between 4.8 percent and 16 percent (though the highest numbers are reserved for those whose estates easily surpass the $10 million mark). New Jersey also has inheritance taxes, making it one of only two states that has both (Maryland is the other state).
Even if you doubt you’ll ever have to worry about the federal estate tax, there should still be an estate plan in place to protect your assets and the future of your loved ones. If you already have an estate plan, these changes in the laws serve as a golden opportunity to review your plan. Farm families should especially keep this in mind and be prepared for the possibility of a return of the state estate tax in Ohio. It’s important to assume nothing and instead, plan for things like long term health care, what you’d like to see happen to your family owned farm and other important financial planning efforts. We’re available to answer questions, make revisions and help you define an estate plan that will ensure you’re confident in your future while you build towards a relaxing retirement.