At the moment, almost all of us don't have to worry about paying federal estate taxes at death. That's because the first $3.5 million of our estates can pass to our heirs tax free. Scheduled to expire in 2010, this limit is likely to be extended by Congress for at least another year and most experts think it is unlikely to be reduced significantly over the next few years.
But here's a new wrinkle--until 2005 most states collected a share of the federal estate taxes collected. But when that 'pick-up' tax expired, they began imposing estate taxes of their own to make up for that lost revenue.
Currently, 16 states and the District of Columbia impose their own separate estates taxes. And several states (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee) also impose an inheritance tax. This falls on those who receive the money when someone dies. And, in many instances, the limit for tax-free transfers for both state tax regimes is less than that federal limit. Which means it's possible for an estate to be free of the federal estate tax while being subject to state estate tax or inheritance taxes.
So, for those doing estate planning in these states, make sure to consider the state angle when considering the probable taxes your heir may face.
To learn more about federal and state estate taxes, see Nolo's Estate and Gift Tax area.