While the federal estate tax was originally repealed in 2010, it came back retroactively on January 1, 2010 with a $5,000,000 exemption that was also in effect in 2011 and then increased to $5,120,000 in 2012. On January 1, 2013 the estate tax exemption was supposed to decrease to $1,000,000, but on January 2, 2013 President Obama signed the American Taxpayer Relief Act into law, which has made permanent changes to the federal estate tax laws. For detailed information about the laws governing estate taxes, gift taxes and generation skipping transfer taxes in various years, refer to All You Need to Know About Estate Taxes.
Aside from federal estate taxes, many states also assess estate taxes, and a few states assess inheritance taxes. For people whose estates will be taxable at the state and/or federal level, they have several options to reduce their estate tax bill.
1. Spend assets.
2. Gift assets.
3. Create a foundational estate plan.
4. Get married.
As mentioned above, beginning in 2011 the federal estate tax exemption has been made "portable" between married couples, which now includes same sex married couples. This means that if one spouse dies in 2011 or a later year and his or her federal estate tax exemption isn't entirely needed to avoid estate taxes, then the unused portion can be added to the surviving spouse's exemption. This, in essence, will allow married couples to pass on up to $10,000,000+ free from federal estate taxes. So, if you're in a committed relationship but not legally married, then consider marriage as a way to minimize estate taxes. But some couples need to be cautious about eliminating AB Trust or ABC Trust planning from their estate plans. For example, if you and your spouse have different final beneficiaries (in other words, you each have your own children or other beneficiaries who you want to inherit your separate estates), then you and your spouse cannot rely on portability to minimize federal estate taxes in both estates. In addition, to date Hawaii is the only state that collects a state estate tax that has adopted portability and it will go into effect in Maryland in 2019, so AB Trust or ABC Trust planning may still be required to plan for state estate taxes in some states.
5. Use advanced estate planning techniques.
6. Move to a new state.
If you currently live in one of the following states that collects a state estate tax and/or an inheritance tax - Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont or Washington - then consider moving to a state that doesn't collect an estate and/or inheritance tax. While this may seem to be an extreme option, the bottom line is that even for a modest estate it can mean saving thousands of dollars in death taxes that will stay in the family instead of going to the government. To learn more about state estate taxes, refer to the State Estate Tax and Exemption Chart. To learn more about state inheritance taxes, refer to the State Inheritance Tax Chart.