Less taxing: the estate tax exemption is $1 million this year, but planning is still needed.

• Author: McKimmie, Kathy
• Position: Estate Planning

Aren't worth a million dollars yet? Although estates up to a million dollars are now exempt from federal inheritance tax, there are still things to consider, says Jack Walkey, attorney with Ball Eggleston Bumbleburg McBride Walkey & Stapleton in Lafayette.

Start with four basics: a will, a good power of attorney, a living will detailing your wishes regarding life support if death is imminent, and designation of a health-care representative. A fifth for most of his clients is a revocable living trust, providing for management of assets while living and potentially reducing attorney and executor fees at death.

Beyond the basics, pre-planning is essential to minimize taxes when ownership of a family farm or business is passed, determine from which pot a charitable contribution should come, or transfer those growing retirement balances in 401(k)s and IRAs--which carry both estate and income tax liabilities.

The Economic Growth and Tax Relief Reconciliation Act of 2001 phases out the estate and generation-skipping transfer tax over a 10-year period, repealing it completely in 2010. Now at $1 million, the exemption moves to $1.5 million in 2004, $2 million in 2006 and $3.5 million in 2009 before disappearing the next year, But unfortunately, it has a sunset provision, meaning Cinderella loses her finery in 2011 when the law reverts back to this year's level of $1 million. Although it's unlikely Congress will allow that draconian result, many experts don't think a repeal will happen either. A permanent level pegged at $2 million to $3 million might be more likely.

Both the new and old tax laws allow unlimited assets to pass to the surviving spouse without estate taxes, with the expectation that taxes will ultimately be collected upon the inheritor's death. But with proper planning and creation of a credit shelter trust before the death of the first spouse, hundreds of thousands of dollars in taxes could be saved says David Cornwell, attorney with Beckman Lawson in Fort Wayne. The trust is typically used to provide income to the surviving spouse, but upon his or her death will pass tax-free to the designee, effectively bypassing the estate tax that would occur if the husband and wife's exemptions were not separated.

Although it's a great estate-planning tool, Cornwell advises clients not to overfund the credit shelter trust as the federal estate tax exclusions increase under the new law.

RETIREMENT FUNDS

The use of defined-contribution retirement...