The State of the States: 2022

State legislatures have been very busy on several trust-and-estate-related fronts. Here’s an update on some key planning developments across the country, through Nov. 30, 2022.

Grantor Trust Reimbursement

Making irrevocable gifts to grantor trusts that are removed from the grantor’s estate for estate tax purposes, yet taxable to the grantor for income tax purposes, essentially allows the grantor to make a double gift. In addition to the gift of property transferred to the trust, by paying the ongoing income tax liability, the grantor relieves the trust beneficiaries from shouldering the tax burden, practically allowing the trust to grow tax free. Furthermore, the grantor reduces their taxable estate by the ongoing tax liability without impacting the grantor’s annual gift and estate tax exemption or generation-skipping transfer tax exemption. Using grantor trusts is often a cornerstone of planning because of these significant benefits.

As powerful a technique as grantor trusts can be, some grantors tire of the tax liability or perhaps the planning is so successful that one or more years generate a much higher tax bill than anticipated. While toggling off grantor trust status can be an option, an alternative solution may be to reimburse the grantor for the tax liability. The risk of including a reimbursement provision in a trust document is the danger that such a provision will subject trust assets to the claims of the grantor’s creditors, which in turn could result in estate tax inclusion.

Pivotal Revenue Ruling 2004-64 provides that when the grantor of a trust who’s treated as the owner of the trust1 pays the income tax attributable to the inclusion of the trust’s income in the grantor’s taxable income, the grantor isn’t treated as making a gift to the trust beneficiaries in the amount of the gift. If pursuant to the trust’s governing instrument or applicable local law, the trust must reimburse the grantor for the income tax payable by the grantor that’s attributable to the trust’s income, the full value of the trust’s assets is includible in the grantor’s gross estate under Internal Revenue Code Section 2036(a)(1). However, if the trust’s governing instrument or applicable local law gives the trustee the discretion to reimburse the grantor for that portion of the grantor’s income tax liability and there’s no express or implied understanding between the grantor and trustee regarding the exercise of the discretion, the existence of that discretion, by itself (whether or not exercised) won’t cause the value of the trust’s assets to be includible in the grantor’s gross estate. However, the ruling provides that the discretion to reimburse the grantor combined with other facts may cause trust assets to be included in the grantor’s gross estate. The other facts that may cause inclusion include: an understanding or pre-existing arrangement between the grantor and trustee regarding the exercise of the discretion; the grantor holding the power to remove and replace the trustee with themself; or applicable local law subjecting the trust assets to the claims of the grantor’s creditors. The holding of Rev. Rul. 2004-64 provides the foundation that propelled state grantor trust reimbursement statutes.

In response to Rev. Rul. 2004-64, at least 14 states2—Arizona,3 California,4 Connecticut,5 Idaho,6 Illinois,7 Iowa,8 Kentucky,9 Maryland,10 Massachusetts,11 Montana,12 North Carolina,13 Pennsylvania,14 Texas15 and Virginia16—have enacted statutes that protect grantors from adverse tax consequences if the trust agreement includes a discretionary reimbursement provision, although the statutes themselves don’t expressly allow a trustee to reimburse the grantor. California’s legislation was just signed into law on June 21, 2022. Settlors of trusts in these jurisdictions may wish to consider including trust provisions that grant a disinterested trustee a discretionary reimbursement power for income taxes paid by the settlor.

Here’s the latest round-up of states whose statutes expressly allow for grantor tax reimbursement:

Colorado. This state permits an independent trustee of a trust to use their discretion in distributing to the grantor an amount equal to any income taxes on the trust’s taxable income for which the grantor is liable, unless otherwise provided in the trust document.17 A settlor’s creditors aren’t entitled to reach trust property due to a reimbursement power granted to a trustee or other third party by the terms of the trust, court order, agreement of the beneficiaries or any other provision of law.18 A trustee can’t exercise their discretion if it would cause estate tax inclusion for any assets intended to qualify for the marital deduction.19

Delaware. Unless the provisions of the governing instrument expressly provide otherwise, if a grantor owns all or part of a trust, a trustee may, in their sole discretion or at the direction or with the consent of an advisor, reimburse the grantor for any amount of their personal federal, state, county, metropolitan region, city, local, foreign or other income tax liability attributable to the inclusion of the trust’s income, capital gains, deductions and credits in calculating the grantor’s taxable income. A 2021 legislative change20 expanded the types of taxes for which a grantor can be reimbursed beyond state and federal income tax to the other categories of taxes noted. This reimbursement power won’t subject the trust assets to the claims of the grantor’s creditors. The trustee may reimburse the grantor directly or may pay the taxing authority on behalf of the grantor.21 The statute doesn’t apply if its application would disqualify or reduce the amount of a marital or charitable deduction.22

Florida. If a person owns all or any portion of a trust under IRC Section 671 or any similar tax law, the trustee may, in their sole discretion, reimburse the grantor for any amount of their personal federal, state or other income tax liability, as long as the trust document doesn’t provide otherwise.23 The trustee may pay the tax reimbursement directly to the grantor or to the appropriate taxing authority.24 A trustee may not reimburse the grantor if the trustee is a beneficiary of the trust or related to the trustee or a subordinate party under IRC Section 672(c).25 A trustee may irrevocably elect out of the statute’s application by providing at least 60 days written notice to the grantor and all persons who have the ability to remove and replace the trustee.26 The statute doesn’t apply if its application would disqualify or reduce a federal tax benefit or deduction, including an annual exclusion, a marital or charitable deduction or direct skip treatment.27

Effective July 1, 2022, Florida amended its statute to clarify that it applies to all trusts governed by Florida law or that have a principal place of administration within the state.28 A discretionary reimbursement power alone won’t subject the trust assets to the claims of the settlor’s creditors.29

Nebraska. This state enacted legislation in 2022, retroactive to Aug. 30, 2015. Except as otherwise provided under the trust, a trustee, other than a trustee who’s a related or subordinate party with respect to the settlor within the meaning of IRC Section 672(c), may in the trustee’s absolute discretion, pay directly to the taxing authorities or reimburse the settlor for any tax on trust income or principal that’s payable by the settlor. A trustee can’t exercise the discretion if it would cause trust assets to be includible in the settlor’s gross taxable estate or if the exercise is inconsistent with the qualification of all or any portion of the trust for the federal gift or estate tax marital deduction.30

New Hampshire. Unless the trust document states otherwise, a trustee has the discretionary power to reimburse the grantor for the portion of the grantor’s income tax liability attributable to the trust under IRC Section 671 or any similar tax law.31

New York. Unless the trust agreement provides otherwise, the trustee of an irrevocable trust may pay to the grantor from principal an amount equal to any income taxes on any portion of the trust principal with which the grantor is charged.32 A grantor’s creditors can’t reach trust property based on the trustee’s discretionary reimbursement powers.33

Who Gets the Pet in Divorce?

While all states have pet trusts laws to recognize the important role pets play in the lives of many, what happens to pets if owners divorce? Historically, pets have been treated as chattel and dealt with in divorce like personal property. More recently, the approach in some states has evolved from a strict property analysis to one that considers the special relationship between pet and owner.34

However, a recent trend has taken the analysis of who gets the pet in divorce to new levels with several states enacting “pet custody” legislation. In these states, courts will typically now be required to consider the well-being or best interests of the pet when awarding possession during divorce or separation proceedings. The “best interests” standard is generally used to determine child custody issues.

Even though prenuptial agreements (prenups) can’t determine custody of children in divorce, it may be advisable for a couple to include pet care and ownership provisions in prenups, including who will be financially responsible and have primary ownership or visitation rights in the event of divorce. Even if those provisions aren’t enforceable in every state and may not ultimately be determinative, they might at least provide evidence of the parties’ intentions regarding a pet’s care and well-being.

Here’s the latest round-up of states that have legislation addressing pet ownership incident to divorce:

Alaska. In 2017 Alaska became the first state in the country to amend its divorce statutes to include authority for courts to grant sole or joint ownership of an animal,35 taking into consideration the well-being of the animal.36 Additionally, when granting a final decree of dissolution, the court must find that written agreements between spouses concerning ownership or joint ownership of an animal take into account the well-being of the animal.37

California. California’s statute specifically addresses the care and ownership of pet animals in the division of community property during a divorce or legal separation.“Pet animal” is defined as any animal that’s community property and kept as a household pet.38 If requested to do so by a party, the court may enter an order, prior to final determination, to require a party to care for the pet animal during the proceedings for dissolution of marriage or legal separation.39 If requested to do so by a party, courts may assign sole or joint ownership of a pet animal taking into consideration the “care” of the pet animal,40 which is defined to include preventing acts of harm or cruelty and providing adequate food, water, veterinary care and safe and protected shelter.41

Illinois. If a court in this state finds that a companion animal of the parties is a marital asset, it must allocate the sole or joint ownership of and responsibility for the animal. In issuing an order, the court is required to take into consideration the well-being of the companion animal.42 To promote an amicable settlement between ex-spouses on the dissolution of their marriage, the parties may enter into an agreement to dispose of property, provide for maintenance, support, parental responsibility and support of their children and, as of 2018, account for companion animals in divorce.43 Accordingly, an agreement between the parties can allocate sole or joint ownership of or responsibility for companion animals, including dividing up the time each spends with the animal.44 The terms of an agreement, except those providing for the support and allocating parental responsibility of children, are binding unless the court finds that the agreement is unconscionable.

Maine. Effective Oct. 18, 2021, this state expanded disposition of property in its divorce statute to include companion animals. A companion animal is defined as an animal kept primarily for companionship rather than as a working animal, service animal or farm animal kept for profit.45 The court must award ownership of the companion animal to only one party after considering all relevant factors, including:

(1) the well-being and basic daily needs of the companion animal;

(2) the amount of time each party has spent with the animal during the marriage tending to nutritional, grooming, physical and medical needs;

(3) the ability of a party to continue to own, support and provide adequate care for the companion animal;

(4) the emotional attachment of a party to the animal;

(5) the emotional attachment of any child in the household to the companion animal and the benefit to the child of the companion animal remaining in the primary residence of the child;

(6) any domestic violence between the parties or in the household of the parties; and

(7) any history of animal abuse or other unsafe conditions for the companion animal.46

New Hampshire. This state’s property settlement statute was amended in 2019 to specifically provide that tangible property includes animals. As part of a property settlement in the dissolution of a marriage, courts must address the care and ownership of the parties’ animals, taking into consideration the animals’ wellbeing.47 Prior to the amendment, courts had no legislative framework to determine who should receive the pet in divorce beyond the standards used to divide property like furniture.

Effective Jan. 1, 2023, this state has amended its statute to provide that the court may review and modify a property settlement agreed to previously only as it pertains to the parties’ animals.48

New York. This state enacted pet custody legislation in 2021. New York courts must now consider the best interests of companion animals when awarding possession during divorce or separation proceedings.49 Companion animals include dogs, cats and other domesticated animals.50 The “best interests” standard is used to determine child custody issues. Many in the matrimonial bar argued that the new law was unnecessary given that the court currently has the discretion to take subjective considerations into account and further that a full-blown obligatory best-interest-of-the-pet standard is excessive, costly, will complicate the determination of other issues and will lead to even more litigation. Despite opposition, the law was enacted.

Telecommuting State Tax Battle

Employees working remotely or on a hybrid schedule have become the new normal. If someone lives in one state and telecommutes to another, what are the personal income tax implications?

Generally, an employee pays taxes in the jurisdiction in which the employee physically performs services. Even prior to the pandemic, however, six states—Arkansas,51 Connecticut,52 Delaware,53 Nebraska,54 New York55 and Pennsylvania56—imposed a so-called “convenience-of-employer rule.” Pursuant to this rule, if employees work from home through the employer’s necessity, the employee will be taxed in the employee’s telecommuting location. If, however, the employee telecommutes for their own convenience, the employee’s wages for those workdays will be classified as if the employee was working from the employer’s physical office. With millions continuing to telecommute in the post-pandemic world, the convenience rule could tax employees as if physically working in the state of their employer’s office, despite never setting foot in that location.

At least 14 states57—ranging from New Jersey to Utah—issued briefs siding with New Hampshire when that state filed a Motion for Leave to File a Bill of Complaint against Massachusetts in the U.S. Supreme Court,58 challenging a state’s constitutional authority to tax a nonresident who’s telecommuting from their home state and neither lives nor physically works in the taxing state. On June 28, 2021, the Supreme Court denied New Hampshire’s Motion. Accordingly, the convenience-of-employer rule remains intact for now, making it prudent for taxpayers to keep careful track of days worked remotely, particularly because tax credits may not eliminate double taxation.

States that issued guidance for 2022 regarding the tax impact of telecommuting include:   

Kansas. This state enacted legislation giving employers the option to continue to withhold income taxes based on the state of the employee’s primary work location and not based on the state where the employee is temporarily teleworking from Jan. 1, 2021 through Dec. 31, 2022.59

Missouri. This state’s Department of Revenue published guidance confirming that the wages of an employee performing services for an employer in exchange for wages in Missouri are subject to Missouri withholding. This applies in the case of remote work when an employee is located in Missouri and performs services for the employer on a remote basis. If a non-resident employee working remotely performs all of their services outside of Missouri for a Missouri-based employer, the wages paid to that employee aren’t subject to Missouri taxes.60

New Jersey. Currently, New Jersey offers its residents a tax credit for taxes paid to other states, such as New York, in order for its residents to avoid double taxation. According to New Jersey’s amicus brief in support of New Hampshire’s Motion,61 New Jersey may have credited up to $1.2 billionto its residents for taxes paid to New York while working at home in New Jersey just for the 12-month period beginning March 2020. In a showing that perhaps enough is enough, New Jersey introduced bipartisan legislation that, according to the Office of the Governor of New Jersey (the Office) “is designed to provide relief to New Jersey residents facing unfair taxation from other states where their employer is based.” According to the Office, the long-standing practice of issuing tax credits to residents who pay taxes to other jurisdictions has cost the state billions in foregone revenue.62 The legislation contains three proposals. The first is to adopt New Jersey’s own convenience-of-employer rule to permit the state to tax employees of New Jersey employers if they reside in another state and work from home for their own convenience (instead of the employer’s need).63 A stated objective is to create parity with New York. The second proposal would incentivize New Jersey residents with tax credits to challenge other states that collect taxes for services the employees performed while physically located in New Jersey.64 The third proposal would create a one-time $10 million pilot program to incentivize job growth and capital investments throughout the state by providing grants to businesses that assign their employees to New Jersey locations.65

South Carolina. The South Carolina Department of Revenue extended until March 31, 2022 its COVID-19 relief period guidance that South Carolina won’t use the temporary change of an employee’s work location during the COVID-19 relief period to impose a South Carolina withholding requirement.66  The relief doesn’t apply to workers whose status changes from temporary to permanent. Accordingly, the wages of nonresident employees temporarily working remotely in another state instead of their South Carolina business location are still subject to South Carolina withholding. The wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location aren’t subject to South Carolina withholding if the employer is withholding income taxes on behalf of the other state.

Vermont. Employees who live and work remotely in Vermont are subject to Vermont income tax on income earned during the entire period that they live in Vermont. This is true even if the employee claims another state as their domicile or if the work the employee performs is remote for a company that isn’t located in Vermont.67 The Vermont Department of Taxes issued guidance68 providing that, although all income earned in Vermont is considered Vermont income, employers aren’t required to begin withholding Vermont income tax from a nonresident employee’s wages until that employee has been working from a Vermont location for 30 days. This applies to employees working from a home, rental property, a co-work space or any other location within Vermont.

Pass-Through Entity Tax Update

The Tax Cuts and Jobs Act of 2017 has limited the deduction for state and local taxes (SALT) to $10,000 since 2018. After a failed constitutional challenge,69 the $10,000 SALT deduction limit will be in effect until it sunsets after 2025.

In Notice 2020-75, the Internal Revenue Service issued guidance permitting a workaround to the cap: partnerships and S corporations (S corps) can elect annually to pay state and local taxes through the entity at the state level in exchange for partners or shareholders receiving a personal income tax credit equivalent to the pass-through entity (PTE) tax. In essence, because the SALT cap applies only to individuals, SALT assessed at the entity level should be fully deductible for federal tax purposes without regard to the individual SALT cap.

Prior to the IRS guidance, Connecticut70 and Wisconsin71 were the first states to enact PTE legislation effective for the 2018 tax year, followed by Louisiana,72 Oklahoma73 and Rhode Island74 enacting legislation that was effective for the 2019 tax year. In response to the IRS guidance, Alabama,75 California,76 Idaho,77 Illinois,78 Maryland,79 Massachusetts,80 Michigan,81 Minnesota,82 New Jersey,83 New York84 and South Carolina85 enacted PTE tax legislation. In the 2021 to 2022 legislative sessions, Iowa,86 Pennsylvania87 and Vermont88 have introduced PTE tax legislation.

That brings the total number to date to 29 states that have enacted PTE workaround legislation and three states that have legislation pending. New York City was the first city to enact a PTE tax.89

These jurisdictions have enacted or amended PTE legislation affecting the 2022 tax year:

Arizona. For tax years beginning on or after Dec. 31, 2021, a partnership or S corp for federal income tax purposes may elect to pay a tax equal to 4.5% of its entire taxable income attributable to resident partners or shareholders and the portion of taxable income derived from sources within the state attributable to its nonresident partners or shareholders.90

Arkansas. For tax years beginning on or after Jan. 1, 2022, general and limited partnerships, limited liability companies (LLCs) and S corps may elect to be taxed as PTEs at a tax rate of 5.9%.91 A nonresident individual who’s a member of an electing PTE isn’t required to file an individual income tax return if their only source of income was derived from the PTE for that taxable year.92

Colorado. This state enacted PTE legislation until the revocation of the federal SALT cap. S corps and partnerships may elect annually to be taxed at the entity level.93 The PTE tax is equal to a percentage of each electing PTE owner’s pro rata or distributive share of the PTE’s Colorado-sourced income.94 The percentage is equal to the corporate tax rate for the applicable year, which is currently 4.55%. The entity claims any credit attributable to the electing PTE’s activities in the taxable year; it doesn’t pass the credit through to the electing PTE owner.95 Electing PTE owners may take a deduction in the amount of their distributive share subject to the PTE tax.

In 2022, this state amended its PTE legislation to allow S corps or partnerships to retroactively elect to be taxed at the entity level for taxable years commencing on or after Jan. 1, 2018, and prior to Jan. 1, 2022.96 The election must be made on or after Sept. 1, 2023, but before July 1, 2024.

Georgia. For tax years beginning on or after Jan. 1, 2022, S corps and electing partnerships may make an annual irrevocable election to be taxed at 5.75% at the entity level.97 Georgia’s PTE law doesn’t allow partners and shareholders to take a credit for taxes paid under the new PTE tax.98 Instead, when an eligible member’s sole source of income is from an electing entity, the member doesn’t have to report any income to Georgia’s tax department.

Illinois. For taxable years ending on or after Dec. 31, 2021 and beginning prior to Jan. 1, 2026, a partnership or S corp may elect annually to be taxed at 4.95% as a PTE.99 Nonresident partners or shareholders aren’t required to file an income tax return if the only source of net income is from the electing entity.100 Additionally, partners and shareholders may also take a credit for the tax paid by the PTE to another state with a substantially similar tax to Illinois.101

Kansas. For tax years beginning on or after Jan. 1, 2022, S corps and partnerships may elect annually to be taxed at the entity level.102 The PTE tax is 5.7% of each electing PTE owner’s distributive share of the PTE’s Kansas-sourced income.103 Electing PTE owners may claim a credit in the amount of the electing PTE owner’s direct share of the tax imposed in the taxable year.104

Louisiana. In 2019, this state enacted PTE legislation that allows S corps or entities taxed as partnerships to elect to be taxed as a PTE.105 In 2021, the graduated tax rates were amended, effective for tax years beginning on or after Jan. 1, 2022.106 The new rates for Louisiana taxable income of every entity that makes the election are 1.85% on the first $25,000, 3.5% on income between $25,000 and $100,000 and 4.25% on income above $100,000.107

Mississippi. For tax years beginning Jan. 1, 2022, S corps, partnerships and similar PTEs may elect annually to be taxed at the entity level.108 The legislation doesn’t specify the applicable tax rates if the entity makes the PTE election. Electing PTE owners may claim a credit in the amount of their pro rata or distributive share subject to the PTE tax.109

Missouri. For tax years beginning on or after Dec. 31, 2022, S corps, partnerships and LLCs may elect annually to be taxed at the entity level.110 The PTE tax is the highest rate of tax used to determine a Missouri income tax liability for an individual, which is currently 5.4%. Electing PTE owners may claim a credit in the amount of their direct and indirect pro rata share of the tax paid by the entity.111 Nonresident qualifying owners with source income only from the qualifying entity don’t have to file an individual Missouri income tax return.112

New Mexico. For tax years beginning Jan. 1, 2022, S corps, LLCs and other PTEs113 may elect annually to pay a tax at the entity level for a taxable year.114 The entity-level tax rate is equal to the higher of the maximum tax rates imposed for individual115 or corporate116 income tax rates for the taxable year, which are currently 5.9%.117 PTEs electing to pay the entity-level tax must make estimated payments of the tax at the same time and in the same amount as the withholding required by Subsection B of Section 7-3A-3 NMSA 1978.118

New York City. Effective for tax years beginning on or after Jan. 1, 2022, an eligible city partnership or an eligible city resident S corp may make the annual irrevocable New York City (NYC) PTE tax election.119 Any eligible city partnership and any eligible city resident S corp that makes the New York State PTE tax election may make the NYC PTE election for the same taxable year.120 The NYC PTE tax is imposed at a flat rate of 3.876% (the highest NYC personal income tax rate) of city PTE tax income.121 Resident partners, members or shareholders receive a credit against their personal income tax equal to their direct share of the NYC PTE tax.122

North Carolina. Effective Jan. 1, 2022, this state permits S corps and partnerships to elect annually to pay the owner’s tax due on their distributive proceed shares. In return, the owner(s) may claim a credit in the amount equal to the member’s pro rata share of the tax for the amount paid by the PTE.123 The tax imposed on the PTE is calculated based on the personal income tax rates, which are 4.99% for the 2022 taxable year.124

Ohio. For taxable years beginning on Jan. 1, 2022, partnerships, LLCs and S corps may elect annually to pay tax at the entity level for a taxable year.125 The PTE tax rate is 5% for the 2022 tax year. Effective for the 2023 taxable year and beyond, the tax rate will equal the rate on taxable business income,126 which is currently 3%.127 Each member of the PTE will receive a credit in an amount equal to their pro rata share of the tax paid by the PTE.128

Oregon. For taxable years beginning on or after Jan. 1, 2022 and before Jan. 1, 2024, a partnership or S corp may elect annually to be taxed as a PTE.129 The PTE tax rate imposed on the entity’s total distributive proceeds is 9% on the first $250,000 and 9.9% on any distributive proceeds in excess of $250,000.130 Each member of the PTE receives a credit against their taxes equal to the member’s pro rata share of the tax paid for the tax year.131

Utah. Effective for tax years from Jan. 1, 2022 to Dec. 31, 2025, S corps, partnerships and LLCs may make an annual irrevocable election on behalf of PTE taxpayers to be taxed at 4.85% at the entity level.132 Eligible PTE taxpayers may claim a non-refundable tax credit equal to the amount paid by the PTE.133

Virginia. For taxable years beginning on or after Jan. 1, 2021, but before Jan. 1, 2026, a partnership, LLC or S corp may elect annually to be taxed at 5.75% as a PTE.134 Each member of the PTE receives a credit against their taxes equal to the member’s pro rata share of the tax paid for the tax year.135 Additionally, partners and shareholders may also take a credit for the tax paid by the PTE to another state with a substantially similar tax to Virginia.136

Estate and Gift Tax

The current $12.06 million exemption, as indexed for inflation, is presently slated to remain in place until Dec. 31, 2025, when it will revert thereafter to $5 million, inflation-indexed.137 There are 13 jurisdictions (Connecticut,138 Hawaii,139 Illinois,140 Maine,141 Maryland,142 Massachusetts,143 Minnesota,144 New York,145 Oregon,146 Rhode Island,147 Vermont,148 Washington149 and Washington, D.C.150) that impose an estate tax and six (Iowa,151 Kentucky,152 Maryland,153 Nebraska,154 New Jersey155 and Pennsylvania156) with an inheritance tax, including one state (Maryland) that imposes both sets of taxes. Here’s the latest state-level activity:

Connecticut. The Connecticut estate and gift tax exemption is up from $7.1 million in 2021 to $9.1 million for 2022.157 For the year 2023 and beyond, Connecticut’s exemption amounts will equal the federal exemption amounts.158 There’s a $15 million cap on an individual’s estate and gift tax liability, meaning no further estate or gift tax will be owed once the cap is reached, which equates approximately to a $129 million estate.

Connecticut remains the only jurisdiction in the country with a true gift tax. Importantly for planning purposes, Connecticut doesn’t impose a tax on gifts of tangible or real property located outside the state, so it’s possible to make gifts with that type of out-of-state property without triggering a Connecticut gift tax.159

Iowa. In June 2021, Iowa enacted legislation160 to repeal its inheritance tax, which ranges from 0% to 15% depending on the relationship of the decedent to a beneficiary. The tax will be reduced by 20% a year beginning with individuals dying in 2021 and culminating in full repeal for individuals dying on or after Jan. 1, 2025.

Maine. Maine’s exclusion amount is $5.6 million, indexed for inflation for individuals dying after Jan. 1, 2018.161 The estate tax exemption increased from $5.87 million in 2021 to $6.01 million in 2022.

Nebraska. On Feb. 17, 2022, this state enacted legislation162 to reduce the inheritance tax for individuals dying on or after Jan. 1, 2023. Individuals under age 22 won’t be subject to the tax; for unrelated individuals, the exemption will be increased to $25,000 per beneficiary and the rate will decrease from 18% to 15%; for non-immediate relatives, the exemption will be increased to $40,000 per beneficiary and the rate will decrease from 13% to 11%; for immediate relatives, the exemption will be increased to $100,000 per beneficiary and the rate will remain 1%. Spouses will continue to be exempt from inheritance taxes.

New York. Effective for those dying on or after Jan. 1, 2019, New York’s exemption amount is linked to the 2010 federal exemption amount of $5 million, indexed for inflation.163 In 2022, New York’s exemption amount was $6.11 million, up from $5.93 million in 2021. However, the New York estate tax regime maintains its built-in “cliff.”164 Only estates that are less than or equal to the exemption amount on the date of death will pay no tax; for those estates that are between 100% and 105% of the exemption amount, there’s a rapid phase-out of the exemption; and those estates that exceed 105% of the exemption amount will lose the benefit of the exemption amount entirely and be subject to tax from dollar one.

While New York doesn’t impose a current gift tax, the New York gross estate of a deceased resident is increased by the amount of any taxable gift made within three years of death if the decedent was a New York resident at the time the gift was made and at the time of death.

Out-of-state real and tangible property won’t trigger a New York estate tax for New York residents. Nonresidents who own real or tangible property located in New York won’t owe any New York estate tax if the value of their New York situs property is below the New York exemption amount at the date of death.

Rhode Island. Pursuant to a law signed in June 2014, this state increased its estate tax exemption amount to $1.5 million in 2015, indexed for inflation.165 For 2022, the estate tax exemption amount increased to $1,648,611.

Vermont. This state’s exemption amount is $5 million for those dying on or after Jan. 1, 2021.166 A flat 16% tax applies to amounts that exceed those levels.

Washington, D.C. In response to the financial impact of the pandemic, Washington, D.C. adopted the Estate Tax Adjustment Amendment Act of 2020.167 The new law reduces Washington, D.C.’s estate tax exemption to $4 million for individuals dying on or after Jan. 1, 2021.168 Beginning Jan. 1, 2022, the new exemption amount will increase annually by cost-of-living adjustments. The 2022 exemption amount is $4,254,800.

Washington state. The current exemption amount is $2 million, indexed for inflation, but there was no inflation adjustment for 2022, so this state’s estate tax exemption remained at $2.193 million.169

Electronic Wills

In today’s technologically driven society, courts have increasingly been called on to adjudicate the validity of electronic writings purporting to be wills.170 This was a controversial topic even before the pandemic jurisdictions had begun to advance their laws to permit electronic wills as our technological capabilities expand.

Nevada was the first state to enact legislation allowing electronic wills in 2001, which was amended in 2017.171 Indiana passed legislation permitting electronic wills in 2018.172 Arizona enacted legislation permitting electronic wills in 2019.173 Florida enacted an Electronic Documents Act in June 2019, which became effective Jan. 1, 2020, and includes electronic wills.174 Illinois enacted the Electronic Wills and Remote Witnesses Act, effective July 26, 2021.175

In July 2019, the Uniform Law Commission promulgated the Uniform Electronic Wills Act (UEWA), which gives a testator the ability to electronically execute a will provided: (1) the will must exist in the electronic equivalent of text (no audio or video wills); (2) the requisite number of witnesses must be physically present or, in states that will allow it, virtually present for the signing of the electronic will; and (3) electronic wills can be revoked the same way as traditional ones, including by a subsequent will or codicil or a revocatory act. Additionally, the UEWA requires that the self-proving affidavit be executed at the same time as an electronic will so the affidavit is part of the electronic will. An electronic will should be recognized as valid if it’s valid under the law of the jurisdiction where the testator was physically located at the time of signing. UEWA doesn’t include requirements regarding the storage of electronic wills, although individual states can add requirements in their statutes.

Utah was the first state to enact the UEWA in August 2020.176 Colorado,177 North Dakota178 and Washington state enacted the UEWA in 2021. Georgia,179 Massachusetts,180 New Jersey181 and Washington, D.C.182 introduced UEWA legislation in 2022.

Here are the states with electronic will legislation that became effective in 2022:

Maryland. This state amended its statute to include electronic wills, effective April 21, 2022.183 A will must be attested and signed by two or more credible witnesses in the electronic presence of the testator.184 At the time the testator executes an electronic will and witnesses sign the will, the testator and all witnesses must be in the electronic presence of each other and a supervising attorney.185 The testator must create a certified will with a complete paper version, including the electronic signatures of the testator and all witnesses, and must have an original paper certification signed and acknowledged by the testator in the electronic presence of a notary public.186

Washington state. This state’s UEWA allows an individual to execute their will in the electronic presence of two or more individuals in different locations communicating in real time to the same extent as if the individuals were physically present in the same location.187 Under Washington’s legislation, an individual doesn’t need to sign their name to authenticate the will; an electronic symbol, an electronic sound or process with present intent to authenticate or adopt a will is sufficient.188 A “qualified custodian” must at all times maintain custody of the electronic will and not alter the electronic will in any way.189 Washington’s UEWA applies to wills of individuals who die on or after Jan. 1, 2022.190

Electronic Notarization

During the pandemic, many jurisdictions issued executive orders temporarily authorizing remote notarization.191 A slew of legislation to enact remote notarization permanently followed. In 2021, many states, including Alabama,192 Arkansas,193 Illinois,194 Kansas,195 Maine,196 New Hampshire,197 New Jersey,198 New Mexico,199 Oregon200 and Wyoming201 enacted legislation that permanently allows remote notarization. In 2022, Delaware,202 Maine,203 North Carolina,204 New York,205 Rhode Island,206 Vermont207 and Washington, D.C.208 enacted permanent legislation to permit remote notarization. Massachusetts extended its COVID-19 remote notarization and witnessing legislation from July 15, 2022 to March 31, 2023.209

—This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. The authors wish to thank their colleague Kayleigh Farrell, in the Management Development Program, for her valuable assistance. Wilmington Trust does not provide tax, legal or accounting advice. Professional advice always requires consideration of individual circumstances. Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation.

Endnotes

1. Pursuant to Internal Revenue Code Subpart E, Part I, Subchapter J, Chapter 1.
2. See Jennifer E. Smith and Kristen A. Curatolo, “Grantor Trust Reimbursement Statutes,” Trusts & Estates (January 2021).
3. Ariz. Rev. Stat. Section 14-10505.
4. CA. A.B. 1866 (2021).
5. Conn. Gen. Stat. Ann. Section 45a-499fff.
6. daho Code Ann. Section 15-7-502.
7. 760 ILCS 3/505.
8. Iowa Code Ann. Section 633A.2304.
9. Ky. Rev. Stat. Ann. Section 386B.5-020.
10. Md. Code Ann., Est. and Trusts Section 14.5-1003.
11. Mass. Gen. Laws Ann. ch. 203E, Section 505.
12. Mont. Code Ann. Section 72-38-505.
13. N.C. Gen. Stat. Ann. Section 36C-5-505.
14. 20 Pa. Stat. and Cons. Stat. Ann. Section 7745.
15. Tex. Prop. Code Ann. Section 112.035.
16. Va. Code Ann. Section 64.2-747.
17. Colo. Rev. Stat. Ann. Section 15-5-818(2).
18. Colo. Rev. Stat. Ann. Section 15-5-818(5).
19. Colo. Rev. Stat. Ann. Section 15-5-818(3).
20. DE. H.B. 164 (2021).
21. Del. Code Ann. tit. 12, Section 3344(a).
22. Del. Code Ann. tit. 12, Section 3344(b).
23. Fla. Stat. Ann. Section 736.08145(1)(a).
24. Ibid.
25. Fla. Stat. Ann. Section 736.08145(3).
26. Fla. Stat. Ann. Section 736.08145(2)(a).
27. Fla. Stat. Ann. Section 736.08145(2)(b).
28. Fla. Stat. Ann. Section 736.08145(2).
29. Fla. Stat. Ann. Section 736.0505(1)(c).
30. Neb. Rev. Stat. Ann. Section 30-3881.
31. N.H. Rev. Stat. Ann. Section 564-B:8-816(c).
32. N.Y. Est. Powers & Trusts Law Section 7-1.11(a).
33. N.Y. Est. Powers & Trusts Law Section 7-3.1(d).
34. In New York, for example, see Raymond v. Lachman, 264 A.D.2d 340, 341 (1st Dept. 1999).
35. Alaska Stat. Ann. Section 25.24.160 and Alaska Stat. Ann. Section 25.24.230.
36. Alaska Stat. Ann. Section 25.24.160(a)(5).
37. Alaska Stat. Ann. Section 25.24.230(a)(6).
38. Cal. Fam. Code Section 2605(c)(2).
39. Cal. Fam. Code Section 2605(a).
40. Cal. Fam. Code Section 2605(b).
41. Cal. Fam. Code Section 2605(c)(1).
42. 750 Ill. Comp. Stat. Ann. 5/503(n).
43. 750 Ill. Comp. Stat. Ann. 5/502(a).
44. Ibid.
45. Me. Rev. Stat. tit. 19-A, Section 953(10).
46. Ibid.
47. N.H. Rev. Stat. Ann. Section 458:16-a(II-a).
48. N.H. H.B. 1103 (2022).
49. N.Y. Dom. Rel. Law Section 236(5)(d)(15).
50. N.Y. Agric. & Mkts. Law Section 350(5).
51. Ark. Rev. Legal Counsel Op. 20200203 (Feb. 20, 2020).
52. Conn. Gen. Stat. Section 12-711(b)(2)(C).
53. 30 Del. C. Section 1124(b).
54. Neb. Admin. R. & Regs. Tit. 316, Ch. 22, Section 003.01C.
55. N.Y. Dept. of Tax. & Finance, TSB-M-06(5)I, www.tax.ny.gov/pdf/memos/income/m06_5i.pdf (March 15, 2006).
56. 61 Pa. Code Section 109.8.
57. Arkansas, Connecticut, Hawaii, Iowa, Indiana, Kentucky, Louisiana, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, Texas and Utah.
58. New Hampshire v. Massachusetts, No. 220154 (2020).
59. KS. S.B. 47 (2021).
60. Missouri Department of Revenue, Alternative Work Location Resources, https://dor.mo.gov/taxation/business/remote.html.
61. Amicus Curiae Brief for States of New Jersey, Connecticut, et al. in Support of New Hampshire, filed Dec. 22, 2020.
62. Office of the Governor, “Governor Murphy Proposes Bipartisan Legislation to Confront the Unjst Taxation of New Jersey Residents by Other States” (Sept. 1, 2022).
63. N.J. A.B. 4694 (2022).
64. Ibid.
65. Ibid.
66. S.C. DOR, Information Letter #21-31, https://dor.sc.gov/resources-site/lawandpolicy/Advisory%20Opinions/IL21-31.pdf (Dec. 21, 2021).
67. VT Dept. of Taxes, “Hiring Remote Employees,” https://tax.vermont.gov/business/withholding (Nov. 10, 2021).
68. Ibid.
69. Denial of certiorari for New York v. Yellen, No. 21-966 (2022).
70. Conn. Gen. Stat. Ann. Section 12-699.
71. Wis. Stat. Section 71.05(6)(a)(14).
72. La. Stat. Ann. Section 47:287.732.2.
73. 68 OK Stat. Section 68-2355.1P-4.
74. R.I. Gen. Laws Section 44-11-2.3.
75. Ala. Code Section 40-18-24.2.
76. CA. Rev. & Tax Section 19900(a)(1).
77. Idaho Code Ann. Section 63-3026B.
78. 35 Ill. Comp. Stat. Ann. 5/201(p).
79. Md. Code Ann., Tax-Gen. Section 10-102.1.
80. Mass. Gen. Laws Ann. ch. 63D, Section 1.
81. Mich. Comp. Laws Ann. Section 206.12
82. Minn. Stat. Ann. Section 289A.08(7a).
83. N.J. Stat. Ann. Section 54A:12-2.
84. N.Y. Tax Law Sections 860 and 861.
85. S.C. Code Ann. Section 12-6-545(G).
86. IA. H.F. 2087 (2021).
87. PA. H.B. 1709 (2021).
88. VT. H.B. 527 (2021).
89. N.Y. S.B. 9454 (2021).
90. Ariz. Rev. Stat. Ann. Section 43-1014.
91. Ark. Code Ann. Sections 26-65-102(2) and 26-65-103(b)(1)(A).
92. Ark. Code Ann. Section 26-65-103(b)(4).
93. Colo. Rev. Stat. Ann. Section 39-22-343(1).
94. Colo. Rev. Stat. Ann. Section 39-22-344(1)(a).
95. Colo. Rev. Stat. Ann. Section 39-22-344(3).
96. CO. S.B. 124 (2022).
97. Ga. Code Ann. Sections 48-7-21(7)(C)(i) and 48-7-23(b)(2).
98. Ga. Code Ann. Sections 48-7-21(7)(C)(iii) and 48-7-23(b)(4).
99. 35 Ill. Comp. Stat. Ann. 5/201(p)(1) and 5/201(p)(4).
100. 35 Ill. Comp. Stat. Ann. 5/201(p)(5).
101. 35 Ill. Comp. Stat. Ann. 5/201(p)(7).
102. KS. H.B. 2239 (2021) Section 3.
103. KS. H.B. 2239 (2021) Section 4.
104. KS. H.B. 2239 (2021) Section 5(a).
105. La. Stat. Ann. Section 47:287.732.2(A)(1).
106. LA. H.B. 292 (2021).
107. La. Stat. Ann. Section 47:287.732.2(B).
108. MS. H.B. 1691 (2022) Section 1(1)(a).
109. MS. H.B. 1691 (2022) Section 1(1)(c).
110. MI. H.B. 2400 (2022).
111. MI. H.B. 2400 (2022) Section 143.436(8)(1).
112. MI. H.B. 2400 (2022) Section 143.436(6).
113. N.M. Stat. Ann. Section 7-2-2(H).
114. N.M. H.B. 102 (2022) Section 3(a).
115. N.M. Stat. Ann. Section 7-2-7.
116. N.M. Stat. Ann. Section 7-2A-5.
117. N.M. H.B. 102 (2022) Section 3(c).
118. N.M. H.B. 102 (2022) Section 3(e).
119. N.Y. S.B. 9454 (2021).
120. N.Y. S.B. 8009-C (2022), Part MM, Subpart B, Article 24-B, N.Y. Tax Section 868.
121. N.Y. S.B. 8009-C (2022), Part MM, Subpart B, Article 24-B, N.Y. Tax Section 869.
122. N.Y. S.B. 8009-C (2022), Part MM, Subpart B, Article 24-B, N.Y. Tax Section 870.
123. N.C. Gen. Stat. Ann. Section 105-153.5(c3).
124. N.C. Gen. Stat. Ann. Section 105-153.7.
125. OH. S.B. 246 (2021) Section 5747.38(B)(1).
126. OH. S.B. 246 (2021) Section 5747.38(B)(2).
127. Ohio Rev. Code Ann. Section 5747.02.
128. OH. S.B. 246 (2021) Section 5747.39.
129. Or. Rev. Stat. Ann. Section Ch. 589, Section 2.
130. Or. Rev. Stat. Ann. Section Ch. 589, Section 3(6).
131. Or. Rev. Stat. Ann. Section Ch. 589, Section 8(1).
132. UT. H.B. 444 (2022).
133. UT. H.B. 444 (2022) Section 4.
134. VA. H.B. 1121 (2022) Section 58.1-390.3(B).
135. VA. H.B. 1121 (2022) Section 58.1-390.3(D).
136. 136. VA. H.B. 1121 (2022) Section 58.1-332(C)(2).
137. IRC Section 2010(c)(3)(C).
138. CT. Gen. Stat. Section 12-391(g).
139. Haw. Rev. Stat. Section 236E-8.
140. 35 Ill. Comp. State. Ann. 405/3.
141. Me. Rev. Stat. tit. 36, Sections 4102 and 4119.
142. Md. Code Ann., Tax-Gen. Section 7-309(b)(3)(i).
143. Mass. Gen. Laws Ann. Ch. 65C, Section 2A.
144. Minn. Stat. Ann. Section 291.016.
145. N.Y. Tax Law Section 952(c)(2)(B).
146. Or. Rev. Stat. Ann. Section 118.010.
147. R.I. Gen. Laws Section 44-22-1.1.
148. Vt. Stat. Ann. tit. 32, Section 7442a(b).
149. Wash. Rev. Code Section 83.100.020.
150. D.C. Code Ann. Section 47-3701.
151. Iowa Code Ann. Section 450.2.
152. Ky. Rev. Stat. Ann. Section 140.070.
153. Md. Code Ann., Tax-Gen. Section 7-202.
154. Neb. Rev. Stat. Ann. Sections 77-2004, 77-2005 and 77-2006.
155. N.J. Stat. Ann. Section 54:34-1.
156. 72 Pa. Stat. Ann. Section 9116.
157. CT. Gen. Stat. Section 12-391(g).
158. Ibid.
159. CT. Gen. Stat. Section 12-641.
160. IA. S.F. 619 (2021).
161. Me. Rev. Stat. tit. 36, Sections 4102 and 4119.
162. NE. L.B. 310 (2021).
163. N.Y. Tax Law Section 952(c)(2)(B).
164. N.Y. Tax Law Section 952(c)(1).
165. R.I. Gen. Laws Section 44-22-1.1.
166. Vt. Stat. Section 7442a(b).
167. 2020 D.C. Law 23-149, Section 7191.
168. D.C. Code Ann. Section 47-3701.
169. Wash. Rev. Code Section 83.100.020.
170. See In re Estate of Javier Castro, No. 2013ES00140 (Ct. Common Pleas, Lorain County, Prob. Div., Ohio, June 19, 2013) (will written with two witnesses on Samsung Galaxy Tablet) and In re Estate of Horton, 925 N.W.2d 207 (Mich. Ct. App. 2018) (typed electronic note on decedent’s phone recognized as valid will).
171. Nev. Rev. Stat. Section 133.085.
172. Ind. Code Section 29-1-21-1.
173. Ariz. Rev. Stat. Section 14-2518.
174. Fla. Stat. Ann. Section 732.522.
175. 755 Ill. Comp. Stat. Ann. 6/1-1.
176. Utah Code Ann. Section 75-2-1401.
177. Colo. Rev. Stat. Ann. Section 15-11-1302(3).
178. N.D. Cent. Code Ann. Section 30.1-37-01.
179. GA. H.B. 940 (2022).
180. MA. S.D. 2927 (2022).
181. N.J. S 2923 (2022).
182. D.C. L.B. 450 (2021).
183. Md. Code Ann., Est. & Trusts Section 4-102.
184. Md. Code Ann., Est. & Trusts Section 4-102(b)(3)(ii).
185. Md. Code Ann., Est. & Trusts Section 4-102(c)(1).
186. Md. Code Ann., Est. & Trusts Section 4-102(d)(3).
187. Wash. Rev. Code Ann. Section 11.02.005(5).
188. Wash. Rev. Code Ann. Section 11.12.410.
189. Wash. Rev. Code Ann. Section 11.12.470.
190. Wash. Rev. Code Ann. Section 11.12.491.
191. See, for example, Delaware, Illinois, Kansas, Kentucky, Louisiana, Maine, New Mexico and New York.
192. AL. S.B. 275 (2021).
193. AK. S.B. 340 (2021).
194. IL. S.B. 2664 (2021).
195. KS. S.B. 106 (2021).
196. ME. H.P. 1033 (2021).
197. N.H. S.B. 134 (2021).
198. N.J. A.B. 4250 (2020).
199. N.M. SB 12 (2021).
200. OR. S.B. 765 (2021).
201. WY. S.F. 0029 (2021).
202. DE. S.B. 262 (2022): effective Aug. 1, 2023.
203. ME L.D. 2023 (2022): effective July 1, 2023.
204. N.C. H.B. 776 (2021): effective July 1, 2023.
205. N.Y. S.B.7780 (2022): effective Jan. 31, 2023.
206. R.I. H.B. 7363 (2021): effective June 30, 2022.
207. VT. H.B. 512 (2021): effective July 1, 2022.
208. D.C. B24-457 (2021): effective Sept. 21, 2022.
209. MA. S.B. 2985 (2021).