Missouri Estate Tax: How to ‘Legally’ Avoid [Top Strategies]

Estate tax issues are challenging even for most CPAs. Make sure you understand the rates, limits and exemptions.

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Paul Sundin, CPA

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Missouri residents have many tax questions. While most of the questions revolve around income tax, residents need to make sure they don’t overlook questions on the Missouri estate tax.

Thanks to recent tax reform, estate taxes are becoming a significant issue nationwide. But you may not have as much to worry about as you thought.

In this post, we are going to look at the estate tax, inheritance tax, and gift tax. There are some surprising details. So let’s dive in.

Missouri estate tax

Fortunately, Missouri does not have an estate tax. However, the federal government does assess an estate tax when you are above the exemption limit.

In fact, most states do not have an estate tax. Missouri is one of 38 states that does not assess one.

The state of Missouri does not levy an estate tax or inheritance taxes. Some states do, however, and this can result in unexpected expenses. A person living in a state that does not levy an estate or inheritance tax may have a difficult time determining which taxes to owe and what the consequences will be.

Inheritance taxes aren’t collected in Missouri, but people who inherit from someone in Iowa, Kentucky, Nebraska, or South Dakota may have to pay this tax. This tax will depend on the amount of the inheritance and how close you were to the deceased person.

In most cases, though, surviving spouses are exempt from paying the tax, and if the inheritance was small, you won’t have to pay any estate taxes at all.

Federal estate tax exemption 

The federal estate tax exemption is $11.7 million for tax year 2021. The good news is that very few estates will be subject to the limit.

When a person passes away, the executor must summarize all the assets in the estate. The fair value of all assets should be determined based on the date of death.

Once a valuation of assets is completed, the executor can then deduct certain administrative expenses and other related expenses.

The estate can also deduct liabilities and obligations of the estate. This would include any mortgages on assets, plus debt and credit cards.

After these liabilities have been deducted, the net amount is taxed at a rate of approximately 40%. With the risk of such a high rate, the beneficiaries should do everything possible to lower the tax bill. 

Estate tax is also called the death tax. Even though this is not the technical term.

Missouri inheritance and gift tax exemption

Missouri also does not have an inheritance tax or a gift tax. Most states with no estate tax also do not have a gift tax.

Even though Missouri has no inheritance tax, Missouri residents could be liable for inheritance tax in other states if they inherit money from someone in another state. 

Thankfully, the US government does not have an inheritance tax either. Only seven states In the country have inheritance tax.

Should I set up a trust?

For the tax year 2020, trustees can still take advantage of a number of trust tax strategies, including paying all deductible expenses before the year ends. Also, they should review investment holdings for unrealized losses and liquidate them to offset capital gains.

If they have accumulated more than $3,000 in net capital losses, they can deduct these losses. Similarly, they can use the accumulated loss to reduce taxable income and avoid underpayment penalties.

The total income of a trust is $120,000 and if there are no deductible expenses or exemptions, the income will be taxable at $111,900. Ordinary income tax rates of up to 37 percent and capital gains tax rates of up to 20 percent will apply to the remaining seventy percent.

This will leave a trust with a fiduciary tax liability of $37,000. However, if the amount is less than this, trustees can elect to treat the capital gain as taxable on the last day of the year, which can lower the overall taxable income.

There are other trust tax strategies that allow taxpayers to avoid state income taxes. In general, the U.S. Supreme Court recently ruled that trusts without a connection to the state can be taxed in the same way as taxable income.

Swap powers are one common method for qualifying a trust as a grantor trust. By using swap powers, the assets of a grantor trust are removed from the grantor’s taxable estate.

How to avoid the Missouri estate tax

As stated, Missouri does not have an estate tax. But don’t lose sight of the federal estate tax. There are multiple strategies that you can use to reduce or even eliminate any tax issues. Make sure to review the following:

  • Grantor Retained Income Trusts (GRIT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Gifts Below Annual Exemption
  • Grantor Retained Unitrusts (GRUTs)
  • 529 Plans
  • Direct Medical & Healthcare Payments
  • Irrevocable Life Insurance Trust (ILIT)
  • Grantor Retained Annuity Trusts (GRATs) 
  •  Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Revocable Grantor Trusts
  • Charitable Gift Annuity
  • Direct Tuition Payments
  • Qualified Terminable Interest Property (QTIP)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Donor-Advised Funds

When should someone consider estate planning?

Estate planning is not for the timid. But everybody should consider some form of estate planning. As such, people who have the following characteristics should take a look at some of the planning ideas:

  • People with life insurance policies of at least $1 million
  • People who will receive a large inheritance
  • Retirement accounts in excess of $1 million
  • People with multiple real estate holdings
  • Business owners and entrepreneurs
  • Medical professionals
  • CPAs, engineers, IT professionals, attorneys
  • Consultants with significant earning potential

Top strategies to minimize estate tax

Take a look at 5 steps to substantially reduce the tax:

  1. Analyze the estate statute

    As you probably know, most states don’t have an estate tax. So make sure your analyze the federal statutes when examining estate tax.

  2. Consider opening a trust

    We have reviewed many of the trust planning ideas available under the tax code. Make sure to consider both revocable and irrevocable trusts. These structures come with various pros and cons.

  3. Ensure gifts below the exemption

    If you fear you have an estate tax issue, the first step in the process is to ensure you make gifts below the current exemption. As such, you are not required to file a gift return.

  4. Consider spousal gifts

    The gift exemption can be doubled if given between spouses. This will further help you get below the current exemption amount.

  5. Review with your tax professional

    Your CPA or tax professional is in a great situation to help with managing estate or gift tax problems. There are various structures that they can assist with to solve the problem (in most situations).

Overall tax structure

Missouri is a moderately tax friendly state. With a reasonable state income tax and property taxes, the residents are not overburdened. Fortunately, not having an estate tax helps out as well.

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