Both the Ohio House and Senate have now voted to repeal the Ohio Estate Tax as of January 1, 2012. The Bill containing the repeal is now in conference but the repeal provision, which is supported by Governor Kasich, appears certain to pass. Ohio, which is one of 22states having its own estate tax separate from the Federal Estate Tax, has long been notorious for having the lowest exemption of only $338,333. The maximum current rate is 7%.
With passage of the repeal, it will be important to review estate plans. Most sophisticated revocable trusts for Ohio residents contained formula provisions to prevent Ohio estate tax on the death of a spouse. However, the price for this zero tax on the first death was a loss of flexibility in the trust for the survivor and reduction in the ability to save federal estate taxes. This is due to the requirement the value of trust assets exceeding $338,333 must be given directly to a surviving spouse or held in a special marital trust. Under the terms of the marital trust, only the spouse can be the beneficiary during his or her lifetime and the trust must distribute all income to the surviving spouse. All income distributed to the spouse to the extent not consumed by the spouse would be included in his or her estate for estate tax purposes. Contrast this with the maximum amount of $5 Million that can be left to a non-marital trust (usually called a “bypass” or “credit shelter” trust) under the federal tax. A surviving spouse can still be a beneficiary but children and other descendants can also be beneficiaries and there is no need to distribute the income for consumption or inclusion in the surviving spouse’s estate for estate tax purposes.
With the repeal of the Ohio estate tax, Ohio residents have a great opportunity to update their revocable trusts to maximize the family savings. Failure to do so may lead to payment of more federal estate tax than necessary.