Should executives weigh state and local death taxes (estate and inheritance) at prospective sites as they plan an expansion or relocation for their business?
Even as the federal government slowly phases out its estate tax by 2010, 19 states and the District of Columbia have decided to retain estate taxes within their borders. Tax rates in these states do vary, as well as the net worth threshold where the tax kicks in. What’s more, some states levy a separate inheritance tax that the heirs pay — not the estate.
Once fully in place, the repeal of the estate tax could cost the federal government as much as $50 billion in revenue per year, according to some estimates. The gradual elimination of the estate tax was part of the federal tax cut package adopted in 2001.
State governments receive revenue, called a pick-up tax, through the federal estate tax by taking a share of the federal taxes paid by large estates.
The legislation that started the phase-out of the federal estate tax will eventually eliminate the share of estate tax that states get to keep. To get back some of what they’re losing, some states are extracting revenue from estates that aren’t large enough to owe any federal tax. To date, about half the states have changed their laws so they can keep collecting estate taxes.
“If there is one type of project where these taxes would be germane, to some degree, it would be in a corporate headquarters, where you have senior, highly paid and, presumably, wealthy corporate executives who would have some concerns with estate taxes,” said John H. Boyd, president of Boyd Co. of Princeton, N.J. “But by the time they have risen to the ranks of CFO, vice president or CEO, these executives have already put their financial house in order.”
For the head of a family-owned enterprise who wants to leave the business to his or her children, the issue of death taxes is a very important consideration, said N. Lindsey Smith, an attorney with the Cleveland-based law firm of Smith & Condeni, and author of “Wealth Management Through Estate Planning.”
“State taxes will have a bigger impact on site selection executives in the future, because of sizable deficits at the federal level that will lead to reduced aid to the states,” Smith said. “The Bush administration is putting more of the fiscal burden on the states, so business executives and owners need to keep this in mind as they consider sites for expansion or relocation.”
Executives may consider setting up shop in states like California, Florida, Nevada and 22 other heir-friendly states, which don’t currently have state estate taxes.
Twelve states currently collect an inheritance tax (as compared with an estate tax). They include Connecticut, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.
Two states are phasing out their inheritance taxes — Louisiana (this year) and Connecticut (in 2006).
Officials in Connecticut aren’t shy about trumpeting the state’s plans to eliminate the inheritance tax.
“We do mention that as a benefit of locating to our state in our sales pitch, but we haven’t really come up to any project where the inheritance tax was a prime consideration,” said Oley Carpp, managing director in the Office of Business Recruitment for the state’s Department of Economic & Community Development.
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