Effective estate planning is essential if you want to preserve your wealth for your children. Beware of making these common estate planning mistakes if you want to avoid paying unnecessary extra estate taxes (death taxes) to the IRS and state taxing authorities thus reducing your children’s inheritance. You will be pleased to know that these costly mistakes are easily avoided with proper planning.

Failure to recognize the significance of the State estate tax law.

Many states have their own estate planning chandler tax (death tax) and the overwhelming majority of those have “decoupled” their estate tax from the Federal estate tax, which means that your estate could be subject to state estate tax even if no Federal estate tax is due.

Since the Federal estate tax exemption currently is $5.12 million (for 2012 only) and the state thresholds for states that impose their own estate tax all are under this amount (most commonly, at $1 million), without proper planning, this discrepancy could result in an unpleasant surprise for your heirs upon your death. You need to review your current financial situation to determine the potential exposure to state estate tax and learn how to minimize it.

Misunderstanding the new Federal estate tax law that went into effect in 2011.

Many sighed in relief when President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17, 2010. They believed that death taxes for all but the very well-to-do were effectively eliminated.

The Act provides for an death tax exemption of $5 million for 2011 and $5.12 million for 2012. The Act also provides for “portability” between spouses of the death tax exemption for estates of decedents dying in 2011 and 2012. Unfortunately, this new regime is temporary and will sunset on December 31, 2012. The death tax regime that existed prior to 2001, with a 55% maximum death tax rate and a $1 million exemption, will be reinstated then.

Although Federal tax law has been temporarily revised, many states continue to have an estate tax exemption of only $1,000,000, with no “portability” of unused estate tax exemption between spouses. You can’t afford to ignore tax planning if you want to minimize or avoid state estate taxes.