Live and Die in Wyoming?

Michael Sheehan

Physician's Money Digest, May 31 2004, Volume 11, Issue 10

Knowledgeable physicians lookingfor a place to spend their golden yearswill scope out the tax territory, digging upfacts on state and local income taxes aswell as how retirement income is treatedunder the local tax structure. The imminentdemise of the federal estate tax hasthrown a new element into the equation.Until Congress began changing federalestate tax regulations in 2001, therewas a 100% credit for any state taxespaid on an estate. Most states relied solelyon this so-called pickup estate tax (ie, atax equal to the maximum state death taxcredit allowed under federal law). Otherstates had a freestanding state death tax,but used the state death tax credit as aminimum or supplemental tax. Underthese rules, most taxpayers never felt thestate tax collector's sting. If you die thisyear, however, your estate will only get a25% credit on the federal estate tax fortaxes paid to the state where you live.Next year the credit goes down to zero.

The effect of the death tax creditphase-out is to reduce revenues in stateswhere the state death tax is tied to thefederal death tax credit, unless the statehas taken legislative action to make upthe shortfall. Since the new federal estatetax law went into effect, 11 states andone district have acted to offset all or partof the impact of the estate tax creditphase-out. This includes eight states(Maine, Massachusetts, Minnesota,Nebraska, North Carolina, Rhode Island,Vermont, and Wisconsin) along withWashington, DC, that have passed lawsto preserve their pickup tax. In addition,Maryland, New Jersey, and Pennsylvaniahave enacted legislation to tie theiruse of the death tax credit as a supplementalor minimum tax to the level ofdeath tax credit as it existed before thefederal law was passed.

Another twist:

Amid all the confusion, 25 statesemerge as essentially estate-tax friendly.Before you make plans to move, however,remember that only estates valued at $1.5million or more (fewer than 2% of allestates) are subject to federal estate taxes.The same is likely to be true for stateestate taxes, since most states link theirexemption to federal law. If you plan to live until 2011, all bets areoff. Unless Congress acts to make the federalestate tax cuts permanent, the tax,which is set to disappear in 2010, willcome back the following year with theexemption at only $1 million.

The list of currently estate tax friendlystates includes: Alabama, Alaska,Arizona, Arkansas, California, Colorado,Delaware, Florida, Georgia, Hawaii,Idaho, Michigan, Mississippi, Missouri,Montana, Nevada, New Hampshire,New Mexico, North Dakota, SouthCarolina, South Dakota, Texas, Utah,West Virginia, and Wyoming.