Estate taxes have become a large part of many politicians' platforms. Estate taxes on the state and federal level have changed a great deal recent years. Not everyone is clear on how these changes apply to them and their estate planning. Keep in mind that state and federal taxes are very different from one another. The bottom line: everything you own, including the face value of insurance policies where you are an owner, gets taxed on a federal level. The federal estate tax exemption is $5 million, and federal estate tax of approximately 35% is levied on any estate valued at more than $5 million. Using the "portability" feature, any married person can pass along any unused portion of their $5 million to their spouse.
Nevada is a state without estate tax. Other states' estate taxes vary greatly from state-to-state. One local example for New Jersey readers is the unlimited marital deduction: for a married couple, the surviving spouse does not have to pay either federal or state estate taxes when the first spouse passes away.
But things can get pretty tricky quickly when you own real estate in a state or states that are not your state of residence. When you die, those other states may seek to tax your estate with their own very different state estate tax. A smart way to avoid this issue is to establish a trust to hold that property. The surest way to avoid estate taxes is to give assets away. However, that's a serious step when you might need those assets to provide for you and your family during your lifetime.
Another way would be to create an irrevocable life insurance trust. In that situation, the trust, and not you, "owns" the life insurance, and if life insurance is purchased directly into the trust, there is no waiting period. But if existing life insurance is transferred into the trust, there's a three-year wait before the life insurance is considered out of your estate.
Another way to remove assets from your estate is to establish a 529 Education Savings account with a named beneficiary. With a 529 plan, even though you're the stated "owner" of the account, it's not considered part of your estate.
Keep in mind there are only a few ways to accomplish this, so work with an experienced estate planning attorney.
Reference: nj.com (October 18, 2015) "Estate taxes explained"