Frequently Asked Questions about
Estate Planning, Wills, Trusts, and Probate

• How can basic estate planning lower my estate taxes and leave more property for my heirs?

Many married couples do kitchen-table estate planning by assuming that all property will be left to the surviving spouse, who will then leave all remaining property to the children. Unfortunately, this well-intentioned and seemingly straightforward plan could result in a substantial estate tax that could easily have been avoided.

For example, assume that Mr. and Mrs. Lee of Arlington County, Virginia, have assets of $4 million in the year 2008, evenly split between them. Their goal is to use the income from that money for retirement, with the balance to pass to their adult children and grandchildren when both die.

Next, assume that Mr. Lee dies in 2008, leaving all his property to his wife. His $2 million estate is not subject to any estate tax (both because it is exactly $2 million and because bequests to a spouse generally are tax-free). Mrs. Lee now has complete control over the $4 million estate.

Let’s assume that Mrs. Lee invests conservatively in bank CDs, spends all of the income from the estate (say, $200,000 per year) and dies one year later in 2009, leaving the $4 million to her children and grandchildren. Her executor will pay out a federal estate tax of $450,000 (based on the projected rates and exemptions in the 2001 Economic Growth and Tax Relief Reconciliation Act), leaving only $3,550,000 for her heirs.

To avoid this substantial tax, Mr. Lee could have left part or all of his property to a "bypass" trust (so called because it "bypasses" the estate tax upon the surviving spouse's death) with his wife as trustee. His wife could then spend all of the income from that trust, and also could spend principal (if she chose to do so) for her "health, education, maintenance, and support" (a standard set by the Internal Revenue Code). If Mrs. Lee wanted to do something not authorized by that broad standard – say, buy a biplane and take up stunt flying – she could dip into her own half of the $4 million.

When Mrs. Lee died, the family trust would not be considered part of her estate. Her estate would be valued at only $2,000,000 (remember, she spent all of the income from the trust). No estate tax would be due – from her or from the family trust, which "bypasses" the tax. The children could receive the entire $4 million estate tax-free – keeping for the grandchildren the $450,000 that otherwise would have gone to Uncle Sam.

In the above examples, we have assumed for simplicity that the $4 million estate doesn’t grow in value after Mr. Lee’s death. Imagine the difference, however, if Mrs. Lee survived another five years, her investments (and the trust’s investments) did a little better, and the $4 million in family wealth (half in the trust, and half owned outright by Mrs. Lee) grew to over $6 million. The projected federal estate taxes (speculating that the rates for that year, not yet established by Congress, would be the same as this year's rates), if no trust were established, would be $900,000, plus 45 cents of every additional dollar over $6 million. But with just the most basic estate planning, the estate tax could be zero, or close to zero, and the Lees’ children and grandchildren would receive more and keep more of the Lees' hard-earned money out of the clutches of the government.

“I’m proud to be paying taxes to the U.S. The only thing is—I could be just as proud for half the money.” –Arthur Godfrey