Some 22 states have a state estate tax or a state inheritance tax. These taxes are in addition to the federal tax. For some people, it’s possible to reduce or eliminate these state taxes by making gifts before the end of 2012.
Ordinarily, you can give up to $13,000 each year to as many people as you like without paying gift tax. Through the end of 2012, you can also make total lifetime gifts in addition to these amounts of up to $5 million. You won’t have to pay gift tax on these additional lifetime gifts, although they will reduce your estate tax exemption when you die.
That means that if you make gifts before the end of 2012 of up to $5 million (such as, for instance, gifts to trusts that will benefit your children), it will have a neutral effect on your federal estate tax – your estate won’t owe more or less as a result.
However, it can have a very positive effect on your state estate tax. By making lifetime gifts rather than bequests in a will, you’ll reduce the amount of your taxable estate, which can lower or even eliminate the amount of state estate taxes that will be owed.
If you live or own property in a state that has a state estate or inheritance tax, this is a strategy you might want to consider.