Montana Estate Tax: 5 Surprising Strategies [+ IRS Pitfalls]

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Paul Sundin, CPA

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The great state of Montana has a lot of advantages. One of them is the current tax environment.

While Montana has seen a large influx of residents, there are numerous questions regarding not only income tax, but estate, gift and inheritance taxes.

In this article, we will tackle many of the estate tax questions associated with Montana. These will be relevant to Montana residents as well as folks who may inherit Montana assets from decedents. So let’s jump in.

Montana estate tax

We’ll start off with some good news. Montana has no estate tax. This is unlike the federal government, which imposes an estate tax for estates that are above the exemption limit.

What this means is that Montana residents and people who inherit assets in the state of Montana, will not be assessed a tax. Beneficiaries do not receive a reduced amount based on the assessment of a Montana estate tax.

How does the federal estate tax work?

But just because there is no Montana estate tax does not mean that you may not face a federal estate tax assessment. The IRS will impose an estate tax for amounts that exceed the exemption amount.

So how does the estate tax work? In theory, it is pretty straightforward. In practice, it can be a little bit more complex.

When someone passes away, the executor of the estate must itemize all assets. This includes real estate, investments, retirement accounts, and anything else owned by the decedent. 

Sharpened colored pencils

The next step is to deduct certain debts as of the date of death. This includes mortgages, credit cards, and any other personal loans or debt.

The estate can then subtract administrative costs and funeral related expenses. The result of this calculation is the net estate. 

This net estate amount is then compared to the exemption amount. If it exceeds the exemption, then a tax return should be filed and the applicable tax paid. But if the amount is lower than the exemption, there is no need to file a tax return. However, it may be beneficial to do it as a result of portability.

What about Montana gift tax and inheritance tax?

I’ve got more good news for you. Montana does not assess an inheritance tax or a gift tax. This gives Montana residents more flexibility to use gift planning strategies to lower the estate tax. 

Even though Montana does not have an inheritance tax, some states do impose one. You may live in a state that has an inheritance tax and receive assets from a state in Montana. Therefore, your current state may assess the inheritance tax even though the assets were in a different estate.

Strategies to mitigate the Montana Estate Tax

You might not currently have a large estate. But that can always change quickly. You should always consider some estate planning strategies. Your attorney and CPA can help you with the following:

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

Who needs estate tax planning?

While everybody must consider estate planning in one form or another, it is critical for many people. If you fall into one of the following groups, you might want to get started immediately:

  • Large stock, bond, and mutual fund investments
  • Professional occupation and/or high-earner
  • Significant real estate holdings
  • Life insurance policies exceeding $1 million
  • Own a business or entrepreneur
  • Retirement plan assets over $1 million
  • Stand to inherit large sums of money

How to avoid the Montana estate tax

Here are the steps to avoid (or minimize) the Montana estate tax:

  1. Make a schedule of all your estate assets and liabilities

    The starting point is to aggregate all the individual assets and liabilities. Assets will include retirement accounts, bank and investment accounts along with life insurance policies.

  2. Obtain valuation estates for real estate and business interests

    These valuations are generally simple for many qualified assets like stocks, binds and mutual funds. But for business interests and real estate holdings it can be a bit more subjective and challenging.

  3. Review estate assets with your estate attorney

    Remember that just because Montana does not have an estate tax does not mean that you won’t have an issue at the federal level. A qualified estate attorney can go a long way to mitigate any issues.

  4. Discuss your situation with your CPA

    Your CPA can actually calculate your estimated estate tax liability. Tax rates and estate tax exclusions can change so make sure the tax liability is calculated with the most recent applicable information.

  5. Consider a trust to protect assets and limit estate

    There are a variety of trusts that can limit estate tax exposure and allow you to pass more money on to heirs. These trust assets can be structured as qualified gifts that can be excluded from your estate.

Overview of Montana tax

Thankfully, Montana has no estate, gift, or inheritance tax. However, they do assess real estate taxes and have a state income tax. 

But when you add all these taxes together, it still is a tax friendly state and has substantially lower taxes than California.

So if estate tax is your concern, Montana is a good place to reside. If you feel you have estate tax issues at the federal level, make sure you communicate your issues to a qualified attorney and CPA. With estate tax rates around 40%, estate taxes can take a chunk out of any estate.

Fortunately, with a little estate tax planning you can mitigate much of this. But of course it depends on the size of your estate.

The estate tax in Montana is based on the value of a deceased person’s assets and the type of will the decedent had. An executor or personal representative must file an INH-4 with the district court clerk to obtain a certificate of no estate taxes owed or taxes paid. A certified copy of the certificate must be filed with the district court clerk before the final distribution of the deceased’s assets can occur. This form is available online.

The U.S. Senate’s Special Committee on Aging argued that there was a need for a new estate tax system, especially since most states have implemented a portability system. The U.S. Senate’s report found that the death penalty for death before 2004 had decreased by 50 percent and that there was a need for a “more progressive” estate tax system. The Montana Estate Tax Act was first enacted in 1926 and was enacted to ensure portability of property and assets.

While there are many advantages to living in Montana, a large number of people are confused about its tax laws. The biggest question is, will my family pay a high estate tax in Montana? If the answer is no, then what can we do? If we die in Montana, will we have to pay an inheritance or estate tax in another state? The answer depends on the size of the estate. If the deceased had no property in Montana when they died, the state’s inheritance tax law will apply.

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