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So many of us are content to have the basic documents in place, and our eyes glaze over when we start to talk about Estate Taxes. Many of us use the "let's wait and see" approach since Congress seems to change its mind so often in this regard.

Estate taxes hit when we die and we leave our assets to someone other than our US citizen spouse or charities. That means you can leave as much as you want to your US citizen spouse. If your spouse is not a US citizen, you will need to set up a QDOT trust to defer the taxes on the trust assets until the person becomes a US citizen. If you are not a US Citizen, different rules apply.

Rates and the amount we are each allowed to pass tax free changes almost every year. This year (2012) we are limited to $5 million. Next year (2013) we will be limited to $1 million, unless a new law is passed. We are hoping for a change in the law, but we don't know what will happen.

Taxes are due within 9 months of death, and a special tax return must be filed if we have more than the amount we are allowed to pass that year.

So how do people avoid estate taxes? There are several ways including, but not limited to:

1. Annual tax-free gifts. Each person can gift up to $14,000 per year to any one person. This can be cash or percentage interests in assets. 529 Plans for education can be front loaded five years in advance (so $70,000 could be gifted all at once and grow income tax free).


2. A living trust can allow a married couple to pass twice as much estate tax free by using both $1 million exemptions ($2 million).


3. Life insurance, when owned inside of an irrevocable life insurance trust will avoid estate tax. It must be properly administered, however. Employee death benefits can't be owned by a trust unfortunately.


4. Valuation discounts for less than 100% ownership in real estate and other assets that are difficult to sell in fractions.


5. Family limited partnerships and limited liability companies.


6. Grantor Retained Annuity Trusts or Unitrusts. It saves estate tax and income tax (charitable deduction). The income goes to charity for a set period of time and whatever is left goes to your loved ones.


7. Charitable Remainder Trust. It converts appreciated assets into lifetime income with no capital gains tax, saves estate taxes and the charity receives whatever is left when you die. It also saves income tax now (charitable deduction).


8. 8) Qualified Personal Residence Trusts. Place your residence into a trust to obtain a discount on its value in the future when you give it early to your next beneficiary.
9. Give money to charity, especially retirement accounts (IRAs).

In addition to all the ways listed in the article mentioned above, a new law allows us to use our deceased spouse's applicable exclusion amount under certain circumstances. This is called "portability." To claim the exclusion amount, your spouse must have died recently, and you must file an estate tax return within 9 months of the death. If you think you may qualify for portability, talk to a lawyer as soon as possible as time is of the essence.

Attorney Heather Tremain has focused her law career on Estate Planning, Trusts and Probate Law since 2000. For five of those years, she was a Specialist in those areas, Certified by the State Bar of California, Board of Legal Specialization. Attorney Tremain was featured in Forbes Magazine in December 2009, as one of 10 "Leading Providers" of legal services in the State of California. For more information, see California estate planning.