If you're using the new year as a time to think about estate planning, you'll need to study up on your state's laws. These days, it's not enough to be aware of just federal tax rules.

Depending on where you live, the state taxes that your heirs pay on your estate could be higher than you expect.

As a result of last year's tax law, Uncle Sam is gradually phasing out estate taxes at the federal level. At the same time, it's getting rid of the state death tax credit. Estates have used that credit to reduce the federal tax dollar-for-dollar up to certain limits. Under the old estate tax laws, the federal government typically reduced the amount owed to it by the amount of estate tax charged by states. The amount states charged was essentially the maximum amount that the federal government would allow as a credit or offset. Now, under new tax laws, federal estate taxes are being reduced. And so is the amount of state estate taxes that the federal government will allow you to use to lower your federal estate tax obligation.

Some states are reluctant to give up that estate tax revenue, so they're creating legislation that "decouples" or separates their rules from the federal government. At least 17 states and the District of Columbia have done so to hold onto their tax dollars. The amount at stake is large. Revenue from such taxes, known as the "pickup tax" or "sponge tax," made up 1.2 percent of states' revenue in fiscal 2002, according to the Center for Budget and Policy Priorities.

"States are still facing a major fiscal crunch," said Elizabeth McNichol of the Washington think tank that tracks state fiscal issues. "I would anticipate more states decoupling in the next legislative session" beginning in January. Indeed, those that don't could lose an estimated $23 billion over the next five years.

Although the combined amount of state and federal estate taxes generally will be lower, those who live in states that have "decoupled" could end up paying more in taxes. Since taxpayers have less to offset taxes via state credits, their federal taxes could be higher. At the same time, some estates could be subject to state taxes even if their assets are exempt from federal taxes.

"At least part of the cost of the federal repeal was thrown on the backs of the states," said Bruno Graziano, a senior analyst at CCH Inc., a provider of tax and business law information and software based in Riverwoods, Ill. Faced with steep revenue declines, a number of states have opted out of the federal change by preserving a part of their tax code in effect before the new tax law. "That would be like a tax increase at the local level."

To be sure, keeping track of state taxes adds yet another wrinkle to estate planning, making it critical for individuals to craft flexible plans that can adjust to pending legislative changes.

Most of the states that have "decoupled" have a provision stating that taxpayers don't have to file state returns if their estates are exempt under the new federal exemption levels. Other states - such as Kansas, Massachusetts, Minnesota, New Jersey, Washington and Wisconsin - require residents to pay state taxes even if their estates are exempt under federal law, McNichol said.

Estates that were exempt under the old law now may be hit with tens of thousands of dollars in state taxes under the new rules.

As a result of Massachusetts' efforts to retain its "death tax," residents with an estate worth $1 million will have to pay $33,200 in state taxes after Jan. 1, even though they would have paid nothing in 2002, said Terence Condren, director of financial planning at Fleet Private Clients Group.

Under current law, the size of estates exempt from federal taxes is $1 million. The exemption will gradually rise to $3.5 million by 2009, and then disappear in 2010 for only one year. In 2011, the estate tax exemption is expected to return to levels set under the old tax law, unless Congress decides to extend the repeal.

The state death tax credit - which is now 75 percent of what it was in 2001, and will be 50 percent in 2003, and 25 percent in 2004 - is scheduled to be replaced by a deduction in 2005.

The top combined federal and state rates will be 54 percent this year, 57 percent in 2003, 60 percent in 2004, 55.48 percent in 2005, 54.64 percent in 2006 and 53.8 percent from 2007 to 2009.

Copyright 2002 Associated Press