Historically, the federal estate tax system provided a limited credit against the federal estate tax for estate or inheritance taxes paid to a state. Thus, under prior federal law (before 2002), to calculate this State Death Tax Credit (SDTC), one essentially applied the federal SDTC rate schedule to the decedent’s taxable estate less $60,000. Because this was a credit against the federal estate tax, however, the SDTC could never be more than the federal estate tax liability. Many states, including Maine, linked its estate tax directly to the federal SDTC. In other words, the Maine tax would equal the SDTC amount or, if the decedent owned property subject to the estate tax in one or more other states, Maine’s proportionate share of the SDTC amount.
The 2001 changes in the federal estate tax system provide for the gradual reduction (25% per year) in the SDTC from 2002 through 2004 and the elimination of the credit in 2005. This essentially directed all of the taxes calculated to the federal government instead of sharing between federal and state coffers. To alleviate the loss of state revenue associated with this change, the Maine system freezes the previous federal law, which means the Maine estate tax now equals the SDTC that would have been due had the federal estate tax laws not changed in 2001. The exemption filing thresholds that would have been applicable under 2001 law were also frozen.
Therefore, to calculate the Maine estate tax, one must determine what the SDTC would have been under the prior federal system. This requires two separate calculations. The first of these is fairly straightforward: reduce the decedent’s taxable estate by $60,000 and apply the SDTC rate schedule in place on December 31, 2002. However, as noted above, since the SDTC is a credit and can only reduce the federal tax that otherwise would have been due, one must also calculate the federal estate tax that would have been due under prior federal law. The Maine estate tax will equal the smaller figure. This second computation is a bit complicated. One must calculate the tentative tax due on the decedent’s taxable estate and lifetime gifts using the federal estate tax rate schedule applicable on December 31, 2002 and then apply the unified credit (provided for in Section 2010 of the December 31, 2000 Code) against that tentative tax. Again, the Maine estate tax will equal the lesser of the SDTC that would have been applicable under the prior law and the federal estate tax that would have been due under the prior law.