Beware that it's not only in-state property that is subject to state taxes, McGuireWoods' Fox says. A client may be a resident of a state, like Florida, that has no state death tax, but own a vacation home in another state, like New York. When the Florida resident dies, the New York home might be subject to New York taxes. "A trust will not solve this issue because it's really where the property is located," Fox says.

Some have tried sheltering homes in limited liability companies, which typically allow membership interests to be taxed in the state in which a person resides. However, Fox warns that Maine has gotten wise to this tactic. If a client has books, pictures, furniture or any other tangible property in a Maine home, that limited liability company is not recognized, he says.

Thomas Silverman, a Palm Beach Gardens, Fla., estate planning attorney, says he has been successful avoiding state death taxes with family limited partnerships, which operate similarly. The family limited partnership is more of a wealth transfer strategy than a business structure. Individuals transfer personal or business assets into a partnership and can grant limited ownership interests to children or other family members.

In fact, a few tactics combined-including a family limited partnership, a donor-advised fund and a revocable trust for jewelry-once helped save a $10 million estate about half a million dollars in Pennsylvania inheritance taxes, Silverman says. The cost: a realty transfer tax that ran about $13,000.

Silverman also saved a client from paying a prohibitive Iowa inheritance tax by putting the title to an Iowa farm in a family limited partnership. Now, however, he is into the second generation of estate planning with at least four families in the single family limited partnership. "We're thinking about whether to break up the families and form their own separate limited partnerships," he says. The reason: "If you have one environmental problem, everyone in the chain of title is liable."

Various versions of the death tax have been surfacing in legislatures in states hard up for cash-sometimes to no avail. In Florida, which has no state income tax or estate tax but a heavy population of seasonal residents, a bill calling for a retaliatory death tax died in two legislative sessions: The language would have imposed a tax for nonresidents on the transfer of Florida property-but only if the nonresident's home state imposed a death tax on Florida residents.

Financial advisors need to get in front of their clients and make sure they are getting legal help, Mayoras advises. Legal documents, like trusts, need to have special language to take advantage of the double estate tax exemption available to spouses. Such documents also need to account for state death taxes.

Plus, clients need to take advantage of all the gifting opportunities. Like the estate tax, the lifetime gift tax and generation-skipping taxes, respectively, also have exclusions of $5.12 million for 2012. So a client might consider giving away up to that amount in 2012 while alive, or risk owing taxes on amounts over $1 million at death, Mayoras notes.

"You might have a married couple with a $10 million federal exemption," Mayoras says, "but you don't stop to think that the state exemption might be $2 million or $1 million." 

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