Many states no longer follow the federal estate tax system (called "de-coupling"). States have been forced to change the laws because of all the revenues that they have lost as a result of the Bush estate tax cuts. These tax cuts are being paid for in part by eliminating the state death tax credit. Apart from all the planning complexity decoupling creates, the situation is getting worse as evidenced by a recent Pennsylvania case.
In the case of The Estate of Berry the court found that the discounts on a family limited partnership were not acceptable. While that doesn't sound particularly newsworthy or nettlesome given how frequently the IRS challenges FLP discounts, here's the rub. The IRS accepted the 33% on the FLP which held cash and marketable securities but, the Pennsylvania tax authorities did not accept that same 33% and the court upheld Pennsylvania's position. So, not only do the estate tax laws of many states differ (primarily the amount that can be excluded from tax) but the states are heading down the path of developing their own laws addressing the details of planning (e.g., discounts) and even differing with the IRS. This can only portend more complexity and confusion - what every taxpayer wants! 2001 Pa Commw. LEXIS 182, In Re The Estate of Helen H. Berry, No. 1485 C.D. 2006 (4/24/07).
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