Several taxpayers have now challenged the decoupled state statutes and were rewarded with victories. In Estate of Hemphill v. Washington Dept. of Revenue (Feb. 3, 2005), the Washington Supreme Court held that a state voter initiative passed in 1981 which eliminated the state inheritance tax and limited the state estate tax to the amount of the state death tax credit could not be interpreted to mean state death credit amount as it existed before EGTRRA. Estates that paid Washington estate tax based on that state’s decoupling regime should now file for state estate tax refunds.

Pennsylvania’s decoupling legislation was challenged on constitutional grounds because it resulted in progressive tax rates. As a result of this legal challenge, the Pennsylvania legislature has repealed its decoupling statutes, retroactive to July 1, 2002. Estates that paid Pennsylvania estate tax based on that state’s decoupling regime should now file for state estate tax refunds.

On July 1, 2002, the New Jersey legislature passed decoupling legislation retroactive to January 1, 2002. Under the legislation, the New Jersey estate tax is based upon the federal estate tax as it was in effect in 2001. The taxpayer in Oberhand v. Director, Division of Taxation (Feb. 23, 2005) died on March 28, 2002, passing all his residual estate to his credit shelter trust, and resulting in a New Jersey estate tax. The New Jersey Tax Court held that the retroactive application of the New Jersey decoupling statute was manifestly unjust to impose a tax on a taxpayer that had specifically and expressly drafted his estate plan in a manner to avoid a state estate tax under the law in effect at the time of his death. As such, unless the New Jersey Supreme Court reverses, estates of decedents dying between January 1, 2002 and June 30, 2002 and which paid New Jersey estate tax should file for refunds.

The interaction of the federal and state estates has become increasingly complex since the enactment of EGTRRA, especially where the taxpayer owns property in more than one state. Clients should have their existing estate plans reviewed to determine whether any changes need to be made. Clients that own property in multiple states should consult with an attorney that is knowledgeable about the laws of the states in question, or who is a member of an organization such as the American Academy of Estate Planning Attorneys, that has attorneys who focus on estate planning and who are located throughout the United States.