If you can't escape death or taxes, then it must be doubly hard to escape death taxes.

        Hard... but not entirely impossible.

Death Taxes
        Death taxes are principally taxes on the transfer of wealth on a person's death.  These taxes often apply whether or not the transfer is through a Will.

        In Tennessee the two primary death taxes are the federal estate tax, paid on the net value of the decedent's estate, and the Tennessee inheritance tax, which closely tracks the federal estate tax.

        The federal estate tax only begins when property in an estate totals in excess of $625,000 a year in 1998 and that figure will go up each year for the next several years (to $650,000 in 1999, $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1,000,000 in 2006), allowing more to pass to heirs without federal estate taxes.  Tennessee also allows similar deductions.

        What's included in a decedent's estate for tax purposes?

        Pretty much everything: all property, regardless of type, in which the decedent held any interest at the time of death, including jointly held property; insurance proceeds on the decedent's life; personal property; cash; business interests; you name it.

        Because the first $625,000 of value in any estate is exempt from federal estate taxes, most estates pass free of federal estate taxes and really need no special estate planning.  But for larger estates, the tax bite can be severe, because the federal estate tax rate is 55%.

Reducing the Tax Bite
        With good tax planning, regardless the certainty of both death and taxes, the bill for death taxes can in fact be reduced for large estates.  (Small estates really face no death tax.)

        One important approach for married couples is the unlimited "marital deduction" for property passing to the surviving spouse.  In other words, if you leave your estate entirely to your surviving spouse, the entire estate passes tax-free, and this marital deduction is in addition to the $625,000 exemption discussed above.  This means that a couple will "lose" the benefit of $625,000 of their estate passing to their ultimate heirs tax free if the entire estate is merely left to the surviving spouse.

        This leads to a second important approach available to couples: creating a Trust on the death of the first spouse, with the surviving spouse named as the Trust beneficiary (and also named as the Trustee if desired), and with the Trust funded to the maximum allowed to pass without paying any estate tax, that maximum now being $625,000.  (Click here for more on Trusts generally, and click here for more on Living Trusts, allowing the beneficiary of a Trust to also serve as Trustee.)On the death of the second spouse the Trust is distributed according to the wishes of first spouse as stated in document creating the Trust, and that distribution is not subject to death taxes; the second spouse to pass then likewise is able to take advantage of that same deduction in their own estate, reducing the tax bill to a large estate by more than $315,000.  That's $315,000 more going to intended heirs instead of to the government.

Gifting To Reduce Estate Taxes
        While you can reduce the tax bill on your estate by planned "gifting", giving away $10,000 a year to each of as many beneficiaries as you desire (the annual limit rises to $20,000 for married couples gifting together).  Gifts of more than $10,000 a year to an individual (or $20,000 a year per individual if a married couple is gifting together) are tax free.  But if you give an individual more than that in any given tax year, there are both federal and state gift taxes (I am reminded of the line from the George Harrison song "The Taxman" when he was with the Beatles: "If you take a walk, I'll tax your feet.  If you take a drive, I'll tax the street.").

        The gift tax rate for Tennessee's gift tax varies according to the "class" into which the intended  beneficiary falls.  "Class A" beneficiaries are spouses, children, lineal ancestors and descendants, siblings,  step-children, and spouses of children.  Class B beneficiaries includes aunts, uncles, nieces, nephews, more distant relatives and non-relatives.  Tennessee only gives the $10,000 exclusion (or $20,000 for spouses) for gifts to class A beneficiaries; class B beneficiaries only get an exclusion of $3,000 per person, per year.

        If a person's gifts to another exceed allowed amounts, the gift tax comes into play.

Generation Skipping Tax
        Another federal tax bite comes through the federal generation-skipping tax, a harsh, flat-rate tax of 55% (or whatever the highest federal estate tax rate in effect at the time might be) imposed on transfers during life or at death to individuals who are two or more generation levels below that of the transferor.

        This happens most often with assets passed to grandchildren, but since a $1,000,000 exemption is available to each transferor, the generation-skipping tax only applies to estates worth more than $1,000,000.  Proper estate planning can generally reduce or eliminate the  generation-skipping tax.  Since the tax rate is 55%, good estate planning can make a significant difference to heirs.

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