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Welcome to our Library, which provides legal information on topics related to the firm's practice areas. This information is not meant to be a substitute for receiving personal legal advice from an attorney. For specific inquiries about legal issues, we invite you to contact us at (843) 626-9000. We update this section throughout the year, so please check back for new articles. We also welcome suggestions on topics for future articles and news.
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Jeffcoat Law Firm Article
What Does “Decoupling” Mean To You And Your Heirs?
By Otis Allen Jeffcoat, III
As I mentioned in a related article (New Federal Estate Tax Provisions Take Effect), in 2001 Congress enacted a sweeping tax reduction law that includes a phaseout of the federal estate tax, culminating in a full repeal in 2010. On a much faster track, the law repeals the federal estate tax credit over the next three years after 2001. By 2005, this repeal of the credit for state death taxes is fully effective. Most estate taxes in the states are linked to this federal credit, and if not unlinked, states would collectively lose $13 billion in revenues by 2007.
“Decoupling” means protecting state taxes by linking the state tax law to the federal law as it existed prior to the 2001 federal amendments. In the short term, decoupling would maintain the level of estate tax revenues received in prior years. In the long run, decoupling would prevent the total elimination of estate taxes in 2010. Nearly every state has linked its estate tax law to the federal code, so repeal of the federal tax would have the effect of repealing state estate taxes. Without decoupling, North Carolina faces the loss of $506 million for the years 2005-2007; South Carolina’s cost is almost $200 million.
North Carolina has decoupled (somewhat), but only for 2002 through 2004.. This means that the estates of many North Carolina residents will face higher potential state estate taxes as a result of the elimination of the federal credit for estate taxes paid. For example, a single North Carolina resident who dies in 2004 with a $1.5 million taxable estate and no deductions would pay no federal estate tax but would pay a substantial North Carolina estate tax (approximately $64,000). This tax burden might be reduced with proper estate planning. The North Carolina estate tax is completely repealed effective in 2005, unless, as anticipated, the state legislature reinstates it in some fashion. Prior to the repeal of the estate tax in 2005, North Carolina’s applicable exclusion amount grows at the same times and in the same amounts as the federal amount under the pre-2001 federal law. So stay tuned!
South Carolina has not decoupled. This means that the South Carolina estate tax mirrors the federal estate tax in its exemptions. Therefore, a single South Carolina resident with a $1.5 million taxable estate who dies in 2004 would pay no federal or South Carolina estate tax. In South Carolina in 2004, a married couple could pass to their heirs (with some basic estate planning) up to $3 million in wealth free of tax, and much more with more advanced planning. However, because failing to decouple will cost South Carolina and its taxpayers more than $190 million in lost estate tax revenues by 2007, South Carolina may not avoid the temptation to decouple much longer. Unsuccessful attempts to decouple were made in the SC General Assembly in 2004. So (again) stay tuned!
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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
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