New Mexico Estate Tax: How 99% of Residents Legally Avoid

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Paul Sundin, CPA

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Are you interested in understanding the New Mexico estate tax? Well I’ve got some good news for you. New Mexico does not have an estate tax.

But before you get too excited, please realize that if you are a resident of New Mexico and your estate is large enough, you will still be subject to estate tax at the federal level.

In this post, we’re going to take a look at estate tax, gift tax, and inheritance tax for residents of New Mexico. Let’s get started.

New Mexico estate tax

As previously stated, New Mexico does not assess an estate tax against its residents. This is really not that surprising because only 12 states have an estate tax and most are pretty minimal.

But if your net worth is high enough, you still could be subject to estate tax at the federal level. With estate tax rates as high as 40%, you should do as much planning as possible to mitigate any tax issues.

Federal estate tax exemption

Let’s take a look at how the estate tax works at the federal level. When a person passes away, the executor of the estate must summarize all of their assets. This will include investments, real estate holdings, and other assets of value. This also will include any business interests.

Once total assets are determined, the estate will subtract debts and mortgages of the decedent. The final step is to reduce the prior amount by any administrative fees as well as funeral related expenses. The net result is then offset by the exemption

Gift tax and inheritance tax

I have some additional good news for you. New Mexico does not have an inheritance tax or a gift tax. This means that when a person gifts an amount or if a beneficiary inherits an amount, they do not have to pay tax in New Mexico.

But be careful. If you live in New Mexico and you inherit money from someone who lived in a different state, you could be subject to inheritance tax. There are seven states that assess inheritance tax, so make sure you review your situation with your CPA to determine if you have to file and pay in another state.

Strategies & Techniques to Avoid the New Mexico Estate Tax

You might not be too concerned about the estate tax. In fact, you might think it won’t impact you because the exemption is so high. But there are proposals to lower the exemption level. So make you you consider the following techniques:

  • Donor-Advised Funds
  • Special Valuation of Farms and Businesses
  • Gifts Below Annual Exemption
  • Charitable Remainder Trusts (CRUT)
  • Grantor Retained Unitrusts (GRUTs)
  • Grantor Retained Income Trusts (GRIT)
  • Revocable Grantor Trusts
  • Irrevocable Life Insurance Trust (ILIT)
  • Grantor Retained Annuity Trusts (GRATs) 
  • Qualified Terminable Interest Property (QTIP)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Intentionally Defective Grantor Trust (IDGT)

Who should initiate estate planning?

Everybody should initiate some form of estate planning. But some people will need some advanced strategies. If you fall into any of the following circumstances, you might need a jumpstart:

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

Estate Tax Return Requirements, Rules & Limits

When your estate is in excess of the exemption, you must file Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return. A few thing you should consider:

  • If the estate is below the exemption amount, you do not have to file an estate tax return (except to elect portability).
  • You must file Form 706 within nine months of the date of the death. If you are unable to timely file, you can request an extension. Just complete Form 4768 to apply for an automatic 6-month extension. 
  • Regarding the portability issue, an executor can only transfer the “DSUE” amount to a surviving spouse if Form 706 is filed on time. 

How to reduce our avoid the tax

Let’s examine the 5 step process to reduce the estate tax:

  1. Examine the federal exemption and rates

    Rate and exemptions are often changing based on new or proposed tax law. Of course, New Mexico does not have an estate tax. So closely analyzing the federal estate and gift tax laws is critical.

  2. Consider an irrevocable trust

    There are plenty of trust strategies available. Closely examine revocable and irrevocable options to see if they fit in your overall structure. Trusts can be structured very differently and often require the filing of a gift tax return.

  3. Complete a gift planning review

    If you think you might have an estate tax issue, make sure to make annual gift amounts below the exemption level. As such, no gift tax return is required. In addition, you could also consider using “Crummy” provisions.

  4. Review spousal gifts

    Remember that gifts can be separated between spouses. This way you can double up on the exemption. So if you are married, this is a great option to consider.

  5. Strategize with CPA

    Your CPA or tax advisor is in an excellent position to start the structuring process. They may not be experts in estate planning. However, they do have an understanding of your situation and, along with an estate attorney, they can be a great starting point.

New Mexico state tax

New Mexico is a moderately tax friendly state. They offer a deduction for Social Security and have low tax rates for people at lower income levels.

Property taxes are relatively low. The average is approximately less than 1% and seniors at specified income levels can elect to have their tax amount frozen.

The state of New Mexico does not assess a sales tax. But it does have a gross receipts tax that is charged to businesses, which is often in turn passed on to customers. Certain local cities can also assess tax which can add an extra 2 to 3%.

If you live in New Mexico and have a largest estate or if you are a beneficiary of an estate in New Mexico, you will not be assessed an estate or gift tax. But make sure you do some high-level estate planning with your CPA and tax attorney. You can still have an estate tax problem at the federal level.

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