Federal estate tax exemption increasing in 2015, but you may still be on the tax hook

On January 1, 2015 the federal unified estate and gift tax exemption will increase from $5.34 million per person to $5.43 million. The top tax rate is now 40% on the portion of a taxable estate in excess of the cap. This means you may give away, without paying any federal estate/gift taxes, a total of $5.43 during your lifetime and/or at death. A married couple can pass twice that amount. And because the federal estate tax is "portable," a surviving spouse may utilize any unused portion of the deceased spouse's exemption.

Most Americans do not have taxable estates and need not incorporate federal estate tax reduction strategies into their estate plans. But it is prudent to remember that the government will always get revenue from somewhere. If it's not from one pocket, it's from another. Keep an eye on your other pockets as you approach your estate planning! Other tax traps may await you:

Capital Gains Taxes:  Do you have a highly appreciated asset that you wish to pass to your heirs? If so, one of the goals of your estate plan will be to reduce capital gains taxes.

One way to do this is to pass the highly appreciated asset to your loved ones at your death, rather than give it away during your lifetime. Assets that you pass at death are inherited with a "step-up" in basis. For example, let's say you bought a home for $100,000 in 1975 and it's now worth $500,000. You'd like to give it to your daughter. But if you give it to her now, and she then sells it, she will owe taxes on $400,000 (the difference between the cost basis and the current value). You would be better off hanging on to the house and passing it your daughter at your death, when she will get it with a step-up in basis. In other words, the government will consider her cost basis to be $500,000, its value on the date she inherits it, not its value on the date you bought it. This will significantly reduce or even eliminate any capital gains tax whenever she chooses to sell it.

Another way to avoid capital gains tax is with a Charitable Remainder Trust. When you place highly appreciated assets in a Charitable Remainder Trust whose ultimate beneficiary is a charity (or charities) of your choice, you receive an immediate income tax deduction. Your designated trustee then sells the asset - without any capital gains tax because charities are exempt from the tax -  and invests the monies in income-producing investments. You then receive income for life from the trust. When you die, your designated charity receives the principal of the trust. Although the trust is irrevocable, you may retain the power to change or add charitable beneficiaries at any time. 

State Estate Taxes: Florida does not have an estate tax, but several other states do. If you are a transplant to Florida, is it possible you will end up back in your original state of residence? Many people relocate in order to be closer to their family. If the state you end up is one that has an estate tax of its own, it's a whole other ballgame from an estate planning perspective.

Here's a sampling of estate tax exemptions in a few places many of my clients hail from:

New Jersey: $675,000. Top tax rate of 16%

District of Columbia: $1 million. Top tax rate of 12%

Maryland: $1.5 million. Top tax rate of  with a top tax rate of  16% 
Connecticut: $2 million. Top tax rate of  with a top tax rate of 12%

New York: $2.062 from Jan. 1 to April 14, 2015. Starting April 15, 2015, $3.125 million with a top tax rate of 16%

When I meet with clients and ask if there is even a remote possibility of their returning to their state of origin, or relocating to a state where their children currently reside or may reside in the future, most don't rule it out. That's why we always try to build in state estate tax planning, in anticipation of this possibility. 

And to put aside the tax issue entirely, don't forget the most important thing to get right with your estate plan: Creating harmony and security for your family and for yourself! See a qualified estate planning/elder law attorney to discuss your estate planning needs.