Although the federal estate tax exemption is now $3.5 million, smaller estates may not escape tax altogether. About half of all states have an estate tax (imposed on the estate) or an inheritance tax (imposed on the heirs) or both. Only a few states have the same $3.5 million estate tax exemption as Uncle Sam.
State laws vary widely. Estate tax exemptions are as low as $675,000 while estate tax rates are as high as 19 percent. So state estate taxes can be steep.
Suppose someone dies with a $1.5 million estate–house, IRA, bank accounts, etc. Say he lives in a state with a $1 million exemption and a 10 percent estate tax rate. His estate would owe $50,000: 10 percent of the excess $500,000.
Some planning might reduce the estate tax bite. A married couple, for example, can leave an amount equal to the state exemption amount to a trust for the surviving spouse and the children, free of estate tax. Then the surviving spouse will have fewer assets in his or her estate and owe less estate tax.
