Ohio Estate Tax Guide: Mistakes to Avoid [+ Top Strategies]

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Paul Sundin, CPA

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We have many clients in the great state of Ohio. Our clients in Ohio often inquire about estate taxes.

This post will provide a comprehensive guide to estate tax issues in Ohio. We will also touch base on inheritance tax and gift tax. So let’s get started.

Does Ohio have an estate tax?

Ohio used to have an estate tax many years back. However, it was repealed and they effectively do not levy estate tax to any residents.

Even though this is good news, don’t forget about the federal estate tax. Any Ohio residents with assets greater than the estate limit will still be subject to the tax at the federal level.

Federal estate tax exemption

The estate tax is commonly referred to as the death tax. Whatever you want to call it, do whatever you can to avoid it.

The good news is that very few people will be subject to it. As of now, only about 1/2 of 1% of taxpayers will be subject to it. This is generally the result of the high estate tax exemption.

So this is how the tax is calculated. When someone passes away, an executor of the estate is appointed. One of the tasks that the executor has is to detail out all the assets and all the debt obligations of the decedent. 

closing 412(e)(3) Plan

When it comes to summarizing the assets, you want to include all estate assets. This includes real estate, business businesses, stocks and bonds, other investment accounts, and retirement accounts. Also, don’t forget personal items like cars, boats, planes, and other household items.

Usually summarizing the liabilities is straightforward. Include any mortgages or loans relating to the assets, but you can also include credit card debt and hospital and medical bills. Take advantage of all estate deductions.

Once the assets are netted with the liabilities, if there is an amount left over that exceeds the federal exemption then the estate tax will be levied. The tax rate is 40%, but there is a lot of discussion about increasing this rate in future years. So make sure you do your research beforehand.

The Federal estate tax is a government tax on the transfer of an estate. The tax applies to property that is transferred by will or by state law. It is a complicated tax, but it can be avoided by planning ahead. Here’s how to avoid this hassle.

First, know what this tax is all about. The federal government considers estates as assets, so you must understand how much you’ll need to pay and when it is due.

A federal estate tax is assessed on the value of the assets that are left behind in an estate, not the purchase price. This means that the assets that the decedent owned will be taxed on the full market value, not the original price.

The tax is meant to protect beneficiaries from paying taxes on their peak values, which is why estates have a high rate of resale value. Fortunately, there are a number of ways to avoid paying estate taxes.

Under the Clinton administration, there was a $2.6 million exemption limit. The top tax rate was 55%. However, this limit was reduced to two million dollars. This means that the estate tax would affect fewer than two out of every 100 estates.

This proposal was a popular one for Rep. Jim McDermott, who proposed HR 3467 in 2011. This bill did not pass the House, but it did pass the Senate and is currently in the House of Representatives.

How to Eliminate or Avoid

Let’s look at the 5 steps to reduce or eliminate the estate tax:

  1. Don’t forget about the federal tax exemption

    Because Ohio does not have an implied estate tax does not mean that you don’t possibly have an estate problem at the federal level. The IRS and federal exemption is indexed each year so it will provide some cushion in future years. Don’t forget about possible rule and exemption changes.

  2. Consider trust options (both revocable and irrevocable)

    Trusts always play a critical role in estate planning. They often require you to file a gift tax return. But the main advantage is that it provides you an estate freeze which will lock in the gift value at the lower rate. Trusts are divided into revocable and irrevocable options. A qualified estate lawyer can determine the appropriate structure for you.

  3. Consider spousal gifts

    Many don’t realize that gifts can be allocated between spouses. This structure will allow you to double the gift tax exemption and possibly not require a gift return for annual gifts. This is a favorite strategy to increase gifting. Depending on the size of your estate, you can lower the need for a revocable trust.

  4. Take advantage of gifts below the exclusion

    Many people don’t understand gift tax laws. The IRS can levy large penalties for gifts. But most gifts are tax-free if they’re made below the exemption level. There are many ways to avoid paying a gift tax. Remember though that it is only applicable when cash or something of value is exchanged. The cost basis will transfer to the recipient.

  5. CPA review

    CPAs typically know your situation better than most. However, they often do not understand gift or estate filing rules. But still, they are a great starting point because they know about your business interests, investments, real estate, dependents and financial strategy.

Avoiding the Ohio Estate Tax

Since Ohio does not impose or levy an estate tax, you don’t have much to worry about in Ohio. But the federal estate tax could still trip you up. There are strategies that you can use to reduce any issues. Make sure to consider:

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

Who should consider estate planning?

Estate planning is never easy. But people who are in the following situations might want to closely examine some of the planning strategies:

  • Medical and healthcare professionals
  • CPAs, engineers, IT professionals
  • People with life insurance policies of at least $1 million
  • People with multiple rental properties
  • Business owners and entrepreneurs
  • People who stand to receive a large inheritance
  • Retirement accounts in excess of $1 million
  • Consultants with significant earning potential

Ohio tax rules and requirements

Take a look at the table below that summarizes the pros and cons:

No estate taxIncome tax
No inheritance taxProperty tax
No gift taxSales & Use tax

Ohio has some complex state and local income tax requirements. Of course it also assesses a real estate tax. But at least there’s good news that it does not impose in inheritance, gift or estate tax.

Don’t forget that you have a lot of planning capabilities in order to minimize any estate tax issues. They are a variety of structures including truss and gifts that can mitigate estate tax problems. So make sure you discuss with your attorney and CPA.

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