Currently, the federal estate tax exemption is $2 million. That’s the amount of assets a decedent can leave to heirs, tax-free, in addition to any assets left to a spouse or to charity. The $2 million exemption is scheduled to remain in place through 2008.
However, more than a dozen states still tax estates of under $2 million. If your state has a $1 million exemption, for example, you could pass a $2 million estate to your children, free of federal tax, but your estate could owe $100,000 in state tax.
If you live in a state with such an estate tax, you can help your heirs to avoid this tax bite by moving to a state that won’t tax your estate. If you relocate to avoid estate tax–or income tax–you should take steps to demonstrate residence in the new state. Register to vote in your new state, change your driver’s license, file tax returns from your new state, and so on.