Can't I just give all my property away before I die and avoid estate taxes?

No. The government long anticipated this one. If you give away more than $12,000 per year to any one person or noncharitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax.

Making gifts of $12,000 or less, however, can yield substantial estate tax savings if you keep at it for several years. Some other kinds of gifts are exempt from the gift/estate tax as well. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $120,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.

Do some states impose estate taxes?

Yes. Even if your estate isn't big enough to owe federal estate tax, the state may still take a bite.

Estate tax. Until recently, most states didn't impose their own estate tax; instead, they took a share of the federal estate tax paid by large estates. (This is called a "pick-up" or "sop" tax.) But the federal legislation that started the phase-out of the federal estate tax put an end to that; states no longer get a share of federal estate tax. To get back some of what they're losing, some states are collecting tax from estates that aren't big enough to owe any federal tax. So far, almost half the states have changed their laws so they can keep collecting estate tax.

For example, in New Jersey, Rhode Island, and Wisconsin, estates worth more than $675,000 may owe state estate tax. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.

Inheritance tax. Some other states impose a separate tax on a deceased person's property, called an inheritance tax. The tax rate depends on who inherits the property; usually, spouses and other close relatives pay nothing or a low rate.

Can I avoid paying state estate or inheritance taxes?

If your state imposes estate or inheritance taxes, there probably isn't much you can do. But if you live in two states -- winter here, summer there -- your inheritors may save money if you can make your legal residence in a state that doesn't impose these taxes.

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