In the past few years, states have been starting to realize how much of a financial hardship an estate tax can be on a family. In an effort to keep people from moving out of state to avoid paying these taxes, have started to repeal estate taxes. An estate tax is a tax applied to whatever income or goods are passed on after a person passes away. Taxible goods can be left to the giftee via a will, trust or even through probate. The Unified Gift and Estate Tax system ensures that people trying to give away their estate pre-death, in an attempt to avoid the estate tax, are taxed on these gifts as well.
There are many gift tax exclusions available, however, getting out of an estate tax is not as easy. At the moment, up to $5,000,000 can be inherited without feeling the pinch of a federal estate tax. However, the maximum allowable inheritance before being subjected to estate taxes will drop to just $1,000,000 in 2013. At the state level, estate taxes vary in allowed amounts. But many states are beginning to see that elderly people are looking into moving to states without an estate tax in an effort to die less expensively.
Twenty nine states currently have no estate taxes. Last year, Ohio repealed it’s estate tax and Indiana passed a bill to slowly remove it’s death tax by 2021. Currently, there are very intense conversations over this issue happening in Tennessee and Nebraska. In Tennessee, there is no income tax, but there is both an estate and gift tax. The state allows only $13,000 in exemptions for estates and gifts and has a death-tax rate that can be up to 9.5%. This means that someone who dies in the state of Tennessee with an estate worth $5 million will end up paying $462,000 more in estate tax than someone living in a state without this tax.
Many people are fleeing from Tennessee to Florida, where there is no estate tax, and are building larger estates. If Tennessee had gotten rid of its gift and estate tax ten years ago, these people would have had no reason to leave and the economy wouldn’t have felt such an impact.
Adding to the loss of income of all the wealthy state jumpers, it costs Tennessee state and local governments over $7 billion to implement the estate tax. The federal government is looking at permanently repealing the federal estate tax, which has large, confusing loopholes and is difficult to comprehend. Currently, the tax only generates about 2% of annual federal revenue, which is barely enough to cover government running costs for a few days.
Over 99% of Americans are not even affected by the tax, because they are not wealthy enough to die with a $5M plus estate. However, repealing this tax costs the Treasury money, which means more taxes are being used. So although most states are moving toward a future without estate taxes, the federal government has yet to decide on a course of appropriate action.