Wednesday, December 9, 2020
Walter Hellerstein (Georgia) & Andrew Appleby (Stetson), State Estate Taxes and the Due Process Clause, 98 Tax Notes State 771 (Nov. 23, 2020):
After two decades of relative dormancy, we are witnessing a resurgence in state estate tax controversies. Federal estate tax amendments beginning in 2001, which eliminated the federal credit for state estate taxes, greatly diminished the general significance of state estate taxes, as most states repealed their preexisting “pickup” or “sponge” taxes designed to absorb the maximum federal estate tax credit. Indeed, as of 2020, of the 50 states that had some form of federally based “death tax” in 2001, had no death tax at all and only 18 states had some form of death tax. Recently, however, five state courts have addressed the due process clause implications of state estate taxes. Each court considered the question of whether the due process clause permitted the state to impose estate tax on qualified terminable interest property. The U.S. Supreme Court has thus far declined to consider this question, having denied petitions for certiorari from two of the state court decisions that raised it (most recently just two weeks ago). In 2019, however, the Court did address a related state trust tax issue in Kaestner, which informs the QTIP due process analysis. ...
State estate tax issues are not the first thing that come to most state tax practitioners’ minds in an era dominated by the tax challenges of COVID-19 and the digital economy. Nevertheless, as the foregoing discussion of QTIP trusts reveals, state estate taxes can raise challenging issues. Indeed, if the federal estate tax becomes more broadly applicable, either through reduced exemptions or other means, QTIP trusts may be the focus of additional estate planning strategies that create state tax issues.
A further complicating factor is the QTIP election procedures at the federal and state levels. For example, New York recently amended its tax law to require the QTIP election to be made directly on a New York estate tax return for decedents dying on or after April 1, 2019. New York law also requires the inclusion of the value of any QTIP for which a New York marital deduction was previously allowed in the surviving spouse’s New York gross estate, whether the QTIP election was made on the transferring spouse’s New York estate tax return or on a federal pro forma return. Maine likewise significantly amended its estate tax effective in 2013 and issued guidance addressing the QTIP election process.
In short, as QTIP trusts become increasingly complex both substantively and procedurally, state tax practitioners should not be surprised to confront variations on the issues that state courts have addressed in recent years.