Technically speaking, Michigan still retains an inheritance tax and an estate tax in its statutes, but neither tax would apply to anyone who died today.
An inheritance tax is a levy assessed upon a beneficiary receiving estate property from a decedent. The amount of the tax depends on the fair market value of the item. The person receiving the item pays the tax, not the estate. The Michigan Inheritance Tax is still effective, BUT ONLY for those beneficiaries that inherited from a person that died on or before September 30th, 1993. It is extremely unlikely that most people who died over twenty-four years ago would have unresolved final affairs, but occasionally an “after discovered asset” will appear long after an estate has been closed. For example, the decedent may have a previously unknown parcel of property that requires administration. If such an asset is discovered, the Michigan Department of Treasury must be notified within 90 days so that the applicable tax can be calculated.
The Michigan Estate Tax was enacted to apply to persons who died after September 30th, 1993 and replaced the inheritance tax. Michigan’s estate tax was based on a provision in the Internal Revenue Code at that time that allowed for a state estate tax credit against the federal estate tax. Essentially, the federal government and the state taxing authority were able to enter into a revenue-sharing agreement where they divided the amount that the federal government collected in estate taxes. Known as the “pick-up tax” or the “sponge tax”, if a Michigan resident was required to file a return and pay federal estate taxes, a portion of the amount collect by the Internal Revenue Service and given to the State of Michigan. Michigan’s estate tax scheme, like several other states at the time, was constructed completely around the state estate tax credit.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act which, among other things, triggered a phase out of the state estate tax credit. A state received only 75% of this credit in 2002, 50% in 2003, 25% in 2004 and finally a compete repeal by January 1st, 2005. U.S. states that based their estate tax statutes around the “pick-up tax” faced two choices. The first option is that the state can repeal and enact a new estate tax statute that is not dependent on the federal tax code. The second option is that the state takes no action and would eventually “decouple” from the federal estate tax in 2005, effectively becoming unable to collect any estate tax revenue whatsoever.
Michigan fell into the second option and no longer collected any estate taxes after January 1st, 2005 once it “decoupled” from the state estate tax credit. The statute has not been amended since and there remains no mechanism to collect Michigan estate taxes. The Internal Revenue Code has yet to be modified to recreate the state estate tax credit and it appears unlikely to resurface in the future. In fact, the Tax Cuts and Jobs Act of 2017 further reduced the number of estates that would be subject to the federal estate tax by doubling the basic exclusion amount of the estate’s gross value.
As of this writing, Michigan no longer collects estate taxes and only collects inheritance taxes if legacies are received from a person that died on or before September 30th, 1993. However, personal representatives who are administering decedent’s estates are still required to file a final MI-1040 return for the decedent and still required to file a MI-1041 return for estates earning taxable income in any tax year.
If you have further questions about Michigan taxation or need legal representation, then do not hesistate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC today.
