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Once the value of your taxable fed-eral estate exceeds $625,000 ($650,000 as of 1999), your estate tax bracket is at least 37% and may be as high as 55%. If the value of your estate approaches this threshold, then it is essential that you consider the federal estate tax as part of your estate planning. Prudent planning can enable you to achieve both your dispositive wishes and substantial tax savings. The concepts discussed below are the foundation of the pyramid of federal estate tax planning alternatives which can enable you to reduce and/or defer your estate tax.

Many people who live modestly do not realize that their estates are subject to federal estate tax, because they are unaware of the all-encompassing nature of the federal gross estate. In addition to all of the assets that you typically think of as estate assets such as your home, personal belongings, bank accounts, securities and other investments, your federal gross estate includes the value of other assets often overlooked in day-to-day life such as your retirement benefits and life insurance proceeds if you control the policies.

If you are married, the tax law permits an unlimited marital deduction, i.e., any amount of property left by one spouse to a surviving spouse, whether through a will, qualifying trust, joint ownership, insurance or other beneficiary designation, is not subject to estate tax. Therefore, you might conclude that the first spouse to die should leave everything to the surviving spouse. However, if everything is left to the survivor, the survivor's estate may be subject to a much larger tax than might otherwise be incurred upon his or her death because everything will be included in the survivor's estate for federal estate tax purposes. Thus, a married Couple should consider the ultimate tax burden both estates will bear.

In addition to the marital deduction the law entities everyone to a "unified credit". This credit can be applied against your gift or estate taxes and equals the amount of property that will generate a tax equivalent to the tax credit. This credit is equal to a property value of $625,000 as of 1998 and increases to $1million as of 2006. Thus, if structured properly, you can leave property of this amount free of estate tax, without regard to the marital deduction or other available deductions. By integrating the use of the unified credit and the marital deduction, you call minimize the estate tax upon the second death while still having no estate tax due upon the first death.

For example, an estate worth $1.2.5 million is in the 41% bracket. If the first Spouse to die leaves all of his or her property to the surviving spouse, there would be no federal estate tax due on the first spouse's death. However, the estate tax due on the survivor's estate would be roughly $246,000, assuming no changes in asset values. This entire tax could be eliminated through proper planning.

Rather than leave your $625,000 exemption amount outright to your spouse, an often used technique is to leave this amount to a "bypass trust" under your Will for the benefit of your spouse and children. Although your spouse can benefit from the income and principal of the trust, the amount entering the trust plus all appreciation thereon earned during tile duration of the trust will escape federal estate, tax in both of your estates.

A critical element of your estate plan is the titling of your assets. You may have a sophisticated Will or life-time trust agreement, but these instruments may not control the disposition of your assets unless your assets are appropriately titled to take advantage of your estate plan. For example, if you and your spouse own stock as joint tenants with right of survivorship, upon the death of the first spouse, the survivor automatically owns the property outright even if the first spouse intended to use this stock to fund the by pass trust contained in his or her Will.

Although the above discussion concentrates on married couples, many planning options are available to both married and single individuals. You may give up to $10,000 each year per donee without generating a gift tax or using any of your unified credit. If you are married and your spouse consents to the gift, the $10,000 amount increases to $20,000 even if the gift is made entirely by one spouse. Additionally, the gift tax exclusions allow you to make direct payments of tuition to qualifying educational organizations and direct payments of medical expenses to qualifying medical care providers in unlimited amounts.

Substantial taxes can be saved through insurance trusts and other more complex measures, as well. We hope to explore these opportunities in future articles.

For more information on this issue and other issues related to estate planning, contact Lowell G. Herman at 410/752-9717.