Typically, when an estate planning attorney in Virginia is reviewing an estate plan or a client’s options for an estate plan, they will review it with estate plan tax exposure in mind. Virginia currently does not have an independent estate tax that is lower than the federal exemption. The federal estate tax exemption is $5,450,000 for decedent’s dying in 2016.
While other local jurisdictions have an exemption that is lower, Virginia does not. However, that does not mean that individuals or residents of Virginia should not be concerned with the estate tax. The first thing to note is that while there may not be a Commonwealth of Virginia estate tax liability, there may still be a federal estate tax liability.
Mitigating the Impact of Estate Tax
If somebody that owns real estate or is a resident of Virginia is exposed to the federal estate tax, there are a number of different options that are available. Some of the general concepts are focused around maximizing each spouse’s exemption or providing for portability for the surviving spouse. Another planning technique is focused on freezing assets at a lower cost basis so that the assets that are “frozen” are included in the decedent’s estate at a much lower level than an appreciated value.
Other opportunities can be focused around permanently giving away assets or gifting during the decedent’s lifetime prior to death and then, finally, there are a lot of opportunities that are focused around charitable giving that could provide some mitigation to exposure to the estate tax.
When reviewing whether or not an estate tax return is due, any assets that are in the decedent’s control on the date of death are includible. This would include all real estate holdings, bank accounts, investments account bonds, personal property, artwork collections, jewelry, tax deferred and non-deferred retirement assets, certificates of deposit accounts, life insurance policies, and any other assets in the decedent’s control on the date of death.
Many individuals believe life insurance is not included for estate tax purposes. However, this is not correct. Assets that are beneficiary-driven or owned jointly with another person or several persons are still includable in the calculation of the gross taxable estate.
Another common misunderstanding is that there is a difference between the assets that are included in the taxable estate and the assets that are includable in the probate estate. Whereas assets in the probate estate may not include jointly or beneficiary-driven assets, table estate does include those assets.
Further Tax Considerations
When somebody passes away, there are generally three taxing systems to be considered. The first taxing system is inheritance tax. Virginia does not have an inheritance tax system, but other local jurisdictions do. For example, if a Virginia resident owned real estate in Maryland and was leaving their estate to a niece or a nephew or a friend, there may be some inheritance tax consequences as a result of that device.
The other taxing systems outside of estate taxes are income taxes. There may be both a federal and state income tax exposure and some planning can often be done in utilizing or maximizing the opportunity for an increase or a step-up in class basis to reduce capital gains, or at least provide some income tax consideration often with regard to estate planning. Finally, estate tax is also considered. The federal estate tax has a maximum tax rate of 40% and is due nine months from the decedent’s date of death.
Estate Tax Return
Generally, Virginia does not require an estate tax return unless there is a federal estate tax return due. The federal estate tax is due nine months from the date of death and is currently filed when assets exceed $5,450,000, for decedent’s dying in the 2016 tax year. An estate tax is a tax on the right to leave assets. The calculation of what is included in an estate tax return is made in accordance with the fair market value of the assets as of the date of death. If that value exceeds the current filing threshold for estate taxes, then an estate tax return would be due.
Virginia currently does not have an estate tax that differs from the federal estate tax filing threshold. However, other local jurisdictions, such as Maryland and the District of Columbia, have estate tax consequences that are different from the federal filing threshold and which do not protect estates up to the federal limit.