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Wisconsin's New
Estate Tax
Federal Statutory Scheme
Wisconsin's New Law
New Wis. Stat. section 72.02 provides:
"72.02 Estate tax imposed. An estate tax is imposed upon the transfer
of all property that is subject to a federal estate tax and that has a
taxable situs in this state. The tax imposed is equal to the federal credit
against the federal estate tax as finally determined. ..."
New Wis. Stat. section 72.01(11m) provides:
"72.01(11m) 'Federal credit' means, for deaths occurring after September
30, 2002, and before January 1, 2008, the federal estate tax credit allowed
for state death taxes as computed under the federal estate tax law in
effect on December 31, 2000, and for deaths occurring after December 31,
2007, the federal estate tax credit allowed for state death taxes as computed
under the federal estate tax law in effect on the day of the decedent's
death."
New Wis. Stat. section 72.01(11n) provides:
"72.01 (11n) 'Federal estate tax' means, for deaths occurring after
September 30, 2002, and before January 1, 2008, the federal estate tax
as computed under the federal estate tax law in effect on December 31,
2000, and for deaths occurring after December 31, 2007, the federal estate
tax as computed under the federal estate tax law in effect on the day
of the decedent's death."
At first glance one might think, after reading new section 72.02, that
a $1 million taxable estate in Wisconsin would be exempt under Wisconsin's
new estate tax law after Oct. 1, 2002, because there is no federal estate
tax payable on a $1 million taxable estate. No federal estate tax return
is filed for estates worth less than the applicable exclusion amount,
which is $1 million in 2002.12 However,
even though a federal estate tax return is not required and no federal
estate tax is due, all taxable estates are subject to federal estate tax
no matter how small. (See Figure 2.) For
example, the federal estate tax on a $1,000 taxable estate is $180. The
applicable credit amount in IRC § 2010 for the year 2002 will be $345,800.
The applicable credit amount eliminates the federal estate tax on the
$1,000 taxable estate.
New Wis. Stat. section 72.01(11m) provides that the state death tax
credit (that is, the new Wisconsin estate tax) for deaths during the five-year
suspension period is the state death tax credit computed under the federal
estate tax law in effect on Dec. 31, 2000. There are several ambiguities
in this provision. One ambiguity involves the actual computation of the
new Wisconsin estate tax. The federal applicable exclusion amount on Dec.
31, 2000, was $675,000, but the federal estate tax law in effect on Dec.
31, 2000, provided for future increases in the applicable exclusion amount
($700,000 in 2002, $850,000 in 2004, $950,000 in 2005, and $1 million
in 2006). One interpretation of Wis. Stat. section 72.01(11m) and (11n)
is that by requiring that the state death tax credit be computed under
the federal estate tax law in effect at the end of 2000, the Wisconsin
Legislature implicitly adopted the scheduled higher applicable exclusion
amounts. However, the WDOR has decided that the federal estate tax should
be computed as if the decedent died on Dec. 31, 2000.13
This WDOR interpretation means that the scheduled increases in the federal
applicable exclusion amount are not part of the new Wisconsin estate tax
law. Under this interpretation, Wisconsin's applicable exclusion amount
is fixed at $675,000 until 2008, when Wisconsin resumes the pick-up tax.
Figure 4 compares Wisconsin's fixed applicable
exclusion amount to the changing federal applicable exclusion amount.
During the suspension period, Wisconsin's applicable exclusion amount
will be less than the scheduled federal applicable exclusion amounts.
Wisconsin will resume picking up the state death tax credit in 2008. However,
because Congress repealed the state death tax credit in EGTRRA, there
will be no state death tax credit to pick up in 2008. Under current state
law, Wisconsin, in effect, has repealed its estate tax commencing in 2008.
For that reason, Figure 4 shows Wisconsin
as having no estate tax in 2008, 2009, or 2010. Since Congress in EGTRRA
provided that the federal estate tax is restored in 2011 as it existed
in 2001, Figure 4 shows a federal applicable
exclusion amount of $1 million for 2011. In this case, the scheduled future
increases in the applicable exclusion amount are included. Since the state
death tax credit also is restored by Congress in 2011, Wisconsin will
have a state death tax credit to pick up in 2011, as shown in Figure
4.
Another ambiguity in new Wis. Stat. section 72.01(11m) and (11n) relates
to the determination of the gross estate and deductions from the gross
estate for Wisconsin estate tax purposes. One interpretation is that Wisconsin
adopted the federal estate tax law as it existed on Dec. 31, 2000. Another
interpretation is that although Wisconsin adopted the federal estate tax
computation in effect on Dec. 31, 2000, it adopted the federal estate
tax law in effect on the date of the decedent's death for all other aspects
of the new estate tax law. The WDOR has determined that the legislature
incorporated the federal estate tax law as it exists on the date of death.14
The WDOR's date of death interpretation simplifies the administration
of Wisconsin's new estate tax for both the WDOR and the taxpayer. If the
legislature incorporated the federal estate tax law as it existed on Dec.
31, 2000, the Wisconsin and federal estate tax laws would be different.
Wisconsin's estate tax law would be fixed as of one day in time, whereas
the federal estate tax law would be changing constantly as Congress made
changes and the courts and IRS made new interpretations of the federal
law. Over time, the Wisconsin law and the federal estate tax law would
diverge more and more.
The WDOR's administrative interpretations can be illustrated by an example.
Assume the decedent dies in 2003 with a $2.5 million gross estate. To
determine the gross estate and the deductions from it, the federal estate
tax law in effect on the date of death is used. Thus, the gross estate
and the deductions from it for Wisconsin and federal purposes are the
same. However, in computing the federal estate tax, the federal applicable
credit amount is $345,800, while Wisconsin's applicable credit amount
is $220,550. The rates applied by Wisconsin also differ from the rates
applied by the IRS. The WDOR uses the rates in effect on Dec. 31, 2000.
The IRS uses the rates in effect on the date of death.
If the Wisconsin estate tax law is the same as the federal estate tax
law, the WDOR does not have to audit the gross estate or its deductions
(lines 1 and 2 of the current Form 706). If the Wisconsin estate tax law
differs from the federal estate tax law, the WDOR will have to increase
its audit staff in order to audit the new tax. Also, if the Wisconsin
and federal estate tax laws are the same, the basis of assets can be the
same for Wisconsin and federal income tax purposes. Under the pick-up
tax system, the Wisconsin basis of assets acquired from a decedent was
the same as the federal basis.15 If assets
are treated differently for Wisconsin estate tax purposes than they are
for federal estate tax purposes, the assets may not have the same basis
for Wisconsin and federal estate tax purposes. The WDOR's date of death
interpretation retains Wis. Stat. section 71.05(10)(e), making the Wisconsin
basis of assets acquired from a decedent the same as the federal basis
for those assets. Having different bases for the same assets would add
one more layer of complexity.
Beginning in 2005, the Wisconsin estate tax will be a deduction from
the federal gross estate. As a result, under the WDOR's date of death
interpretation, since the Wisconsin estate tax is a deduction, the computation
of the federal taxable estate and the Wisconsin estate tax will be interrelated.
The federal taxable estate must first be computed without deducting the
Wisconsin estate tax. Once the taxable estate is known, the Wisconsin
estate tax is computed by using Table B in Figure
3. The Wisconsin estate tax is deducted from the federal gross estate,
which reduces the taxable estate. The reduced taxable estate lowers the
Wisconsin estate tax, which in turn changes the taxable estate, which
changes the Wisconsin estate tax and so forth. The computations must continue
round-robin until the Wisconsin estate tax stops changing. Unless software
is made available, those calculations will have to be made by repetition
or use of an algebraic formula. The computation would not be interrelated
if the 2000 federal estate tax applied because a state estate tax was
not a federal deduction in 2000.
The WDOR's date of death interpretation will be advantageous for some
taxpayers and disadvantageous for others. For example, in EGTRRA, Congress
expanded the scope of conservation easements as a deduction from the gross
estate. Under EGTRRA, qualifying real property located anywhere in the
United States qualifies for a conservation easement. Under the federal
estate tax law in effect on Dec. 31, 2000, the qualifying real property
must be located within 25 miles of a metropolitan area, national park,
or wilderness area, or within 10 miles of an urban national forest. If
the 2000 law applies, Wisconsin has adopted the more restrictive conservation
easement definition. If the date of death law applies, the Wisconsin and
federal deductions are the same.
As another example, under the 2000 federal estate tax law, there was
a deduction of up to $625,000 from the gross estate for a qualified family-owned
business (QFOBI). In EGTRRA, Congress repealed the QFOBI deduction for
estates of decedents dying after 2003. In 2002 and 2003, the federal QFOBI
deduction will be $300,000. If the federal law in 2000 is applied, the
Wisconsin QFOBI deduction is fixed at $625,000 for 2002 through 2007.
Under the date of death interpretation, the Wisconsin QFOBI deduction
will be the same as the federal deduction, that is, $300,000 in 2002 and
2003 and repealed in 2004.
The WDOR's date of death interpretation implicates the Wisconsin Constitution.
Under Article IV, section 1, the legislative power is vested in the Wisconsin
Legislature. WDOR's interpretation that the federal estate tax law on
the date of death applies could be viewed as an improper delegation of
legislative authority to the federal government.16
One way to eliminate that argument is for the legislature to periodically
adopt the previous year's federal estate tax law as it does with the federal
income tax.17
Examples 
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