A financial advisor contacted me recently regarding one of her clients. A widow died in 2006, leaving her estate to her daughter. Her estate included US Savings bonds of $350,000, of which $280,000 was interest which she had never paid tax on. The daughter had the bonds changed to her name, thereby deferring the income tax until the savings bonds matured. This can make sense, but in this case it did not. Because the estate was subject to state estate tax, but not federal estate tax, there is no offset against the future interest income for the state estate tax paid. In other words, there are two taxes on the interest income, state estate tax and federal and state income tax.
A better plan would have been to realize some or all of the interest income on the final income return of the widow. That way the income tax paid would be a deduction against the assets of the estate, thereby saving Maryland estate taxes AND avoiding the double tax situation.
This is a classic example of having to pay more tax than necessary because of the lack of proper planning and lack of obtaining professional tax advice after someone died.