A state death tax liability may be looming for older estate plans that have not been updated since the 2001 federal legislation was enacted. The estate plans of a married couple may be amended so that upon the death of the first spouse the decedent's estate is divided into three shares.

The first share (the "credit shelter trust") is equal to the applicable state estate tax exemption and will not be subject to any estate taxes.

The second share (the state QTIP trust) is funded with an amount equal to the difference between the deceased spouse's state exemption and his federal exemption and is then subject to the state's death tax upon the surviving spouse's death.

The third share (the federal QTIP trust) is funded with the rest of the decedent's estate and is subject to both federal and state estate taxes when the surviving spouse dies. A complete estate tax deferral is possible by making a state-only QTIP election to the state QTIP trust, which would qualify it for the marital deduction for state death tax purposes. Both federal and state QTIP elections will be made for the federal QTIP trust.

Example 3

If a married Rhode Island resident dies in 2008 with a taxable estate of $3 million, then according to his updated revocable trust, his estate would be divided into the following three shares: the credit shelter trust would be funded with $675,000, an amount equal to the Rhode Island estate tax exemption; the Rhode Island QTIP trust would be funded with $1,325,000, an amount equal to the difference between the applicable federal estate tax exemption ($2 million) and the Rhode Island exemption;and the federal QTIP trust would be funded with $1 million, the remainder of the resident's estate.

Sometimes, it's possible to make a state-only QTIP election when a federal QTIP election has not been made, though not always. For residents of these states, the decision must be made whether to pay state estate taxes at the first spouse's death or defer estate taxes until the surviving spouse's death. The drawback to complete deferral is the increase in the size of the surviving spouse's taxable estate for federal estate tax purposes.

Example 4

If a married New York resident dies in 2009 with a taxable estate of $5 million, according to her pre-EGTRRA revocable trust, her estate would be divided into two shares: the credit shelter trust would be funded with $3.5 million, an amount equal to the available federal estate tax exemption, and the marital deduction trust would be funded with $1.5 million- the remainder of her estate. Federal and New York QTIP elections would be made for the marital deduction trust. Since New York has decoupled and frozen its estate tax exemption at $1 million, the New York estate tax liability would be $229,200.

Example 5