The new tax law provides a $5 million exclusion from federal estate tax and exclusion portability between spouses. Therefore, married couples effectively have a $10 million exclusion. Most married couples won’t have to worry about federal estate tax.
Nevertheless, many states still have their own estate tax. Exclusion amounts might be much lower, perhaps $1 million or even $675,000. Couples who simply pile up assets in the estate of the surviving spouse might trigger an unnecessary tax bill.
Suppose Alan Brown dies in 2011 and leaves everything to his wife Claire. Claire dies in 2012. When Claire’s executor adds up all of her assets–primary residence, vacation home, IRA, bank accounts, mutual funds, etc.–the total is $2.5 million.
No federal estate tax is due. However, Claire lives in a state with a $1 million estate tax exclusion. With $2.5 million in assets, Claire’s estate is $1.5 million over her state’s limit. Depending on the state estate tax rate, Claire’s estate could owe $100,000 or more in tax.
That tax could have been minimized or avoided altogether with some planning. Alan might have left his assets to a trust, and named Claire among the trust beneficiaries. Properly structured, the trust assets could be excluded from Claire’s estate.