Tips on Avoiding State Death Taxes

Twenty-two states and the District of Columbia currently impose a death tax on their taxpayers. These taxpayers have options when it comes to avoiding paying these taxes, however.

One option is to make a large lifetime gift. The current federal law grants taxpayers a $5 million gift exemption ($10 million for married couples). Another option is to make annual exclusion gifts. Taxpayers can give an unlimited number of people gifts up to the annual exclusion amount ($13,000, currently) without incurring a gift tax.

Additionally, gifts made directly for another person’s medical or education needs are also done tax free. Charitable trusts are another option available to taxpayers wishing to avoid high death or gift taxes. Charitable gifts also allow the donor to receive an income tax deduction.

It is important, however, for taxpayers to keep in mind that lifetime gifts may not be the best estate planning technique for all people. It is important to discuss any estate planning strategy with an experienced estate planner.

For more information on avoiding death and gift taxes, see Hani Sarji, How to Cut State Death Taxes—Without Moving, Forbes, Jul. 13, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.