Now take into consideration the same woman who died in the previous case, except that this time her estate plan has been amended since the passage of the Economic Growth and Tax Relief Reconciliation Act.

The credit shelter trust would be funded with an amount equal to the lesser of the federal estate tax exemption and the New York estate tax exemption at the time of her death, which is $1 million.

The rest of her estate, $4 million, would fund the marital deduction trust, and federal and New York QTIP elections would be made for this trust.

At the time of her death, the applicable federal estate tax exemption is $3.5 million, and $2.5 million of this exemption would be unused. Depending on the size of the surviving spouse's taxable estate when he dies, this may mean an additional federal estate tax of $1,125,000, significantly higher than the estate tax liability incurred when the same person died in Example 4.

Planning For The Patchwork State Estate Tax

A significant state death tax liability may arise as a result of a decedent having assets in multiple states. The estate tax rules of many states assume that all the states' codes are based on the IRC section 2011 state death tax credit. For example, the Massachusetts estate tax applicable to its residents is based on the decedent's federal gross estate, i.e., all of the decedent's property, no matter where located. The Massachusetts estate tax liability is decreased by death taxes paid to other jurisdictions. So what if the decedent has property in a state in which there is no death tax?

Example 6

Say a widowed Massachusetts resident dies in 2008 with a $3 million taxable estate consisting of a $1 million Miami condominium and $2 million in Massachusetts property.

The latter state decoupled in July 2002 and froze its estate tax exemption at $1 million beginning in 2006. Florida does not have a state death tax. For Massachusetts estate tax purposes, the Miami condominium is included in the decedent's gross estate. The Massachusetts estate tax would be $182,000, although the tax on Massachusetts property would be $99,600.

Example 7