Each of us has several different "estates" for estate planning purposes. The first is your "taxable estate," which consists of the assets you own that will be includable in your estate for estate tax purposes. This "estate" includes all the things you own or have control over at the time of your death. Your taxable estate will include all of your clothing, furniture, jewelry, collectibles, antiques, bank accounts, investments, real estate, retirement accounts, and life insurance policies - in short, everything. Since the estate tax is a tax on the transfer of assets, the value of the assets owned is the amount that is subject to the tax. The other kind of estate is your "probate estate." Your probate estate consists of all of the things that you personally own at the time of your death. Assets excluded from your probate estate are those held jointly with another person(s), and assets such as life insurance, retirement assets, and annuities, having a beneficiary designation. Everything in your probate estate is also a part of your taxable estate, but not necessarily the other way around.

Yes. All assets in which you have any ownership interest at the time of your death are subject to estate taxes. This includes insurance proceeds payable at death, interest in joint tenancy assets, retirement funds, homes - everything. However, the law provides you with some relief. All assets passing to a surviving spouse generally pass free from estate tax regardless of value. This is the result of the unlimited marital deduction. As the term indicates, this deduction is unlimited. Additionally, we are each given an exemption against federal estate taxes for assets passing to a non-spouse beneficiary. In 2006 that exemption is $2,000,000. This simply means that if the value of your total estate, net of bills and expenses is $2,000,000 or less, there will be no federal estate tax. If your estate exceeds the exemption amount, the effective tax rates that determine your federal estate taxes begin at 45% and can be as high as 48% of the excess over the exemption amount. The tax is literally confiscatory and can result in serious estate shrinkage!

The primary objective of any estate plan should be the disposition of assets to the beneficiaries you intend, in a manner consistent with your wishes, taking into consideration the age and aptitude of those beneficiaries, and the protection of minors and those not able to manage their assets themselves. There are a number of things that can be done, within the planning process, to minimize, or even eliminate, in some cases, the estate tax. Since the size of your estate determines the amount of tax that will be owed, the extent to which you can reduce the size of your estate will correspondingly reduce the amount of tax that will be owed at your death. There are generally two ways that this can be accomplished: * making gifts that remove assets from your estate, or * discounting the assets which remain in your estate so that they are worth less for estate tax purposes. Gifts fall within a number of different categories. Charitable gifts give you a dollar-for-dollar credit against estate taxes. Gifts to Charitable Trusts can provide you with an ongoing stream of income and provide you with an income tax deduction, and reduce your estate at the same time. Gifts to individuals can be present interest gifts, or future interest gifts, such as gifts to trusts for the benefit of a child, where the child benefits down the road. An effective use of gifting is to give away something that has little value during life, but a substantially higher value at death, such as a life insurance policy. Imagine being able to reduce your taxable estate by several hundred thousand dollars simply by transferring a life insurance policy to a trust, rather than owning it yourself. You can also leverage your gifting, by using vehicles such as Grantor Retained Annuity Trusts or Family Limited Partnerships. A discussion of such methods of estate tax reduction is beyond the scope of this brief explanation.

It is very important to distinguish between income taxes and estate taxes. Most people have the understanding that life insurance proceeds are not "taxable." In most cases life insurance proceeds are not subject to income taxes. However, the proceeds of a life insurance policy over which the decedent had any incidents of ownership are subject to estate taxes. Income taxes and estate taxes are two entirely different forms of taxation, and should not be confused. Estate taxation of a life insurance policy depends on who owns the policy at death and who has control over the various aspects of the insurance contract, such as the right to change beneficiaries, and to borrow against the policy. If you own the policy or have any incidents of ownership, the policy proceeds will be includable in your taxable estate, and subject to estate tax. If you do not have any incidents of ownership (for example, if the policy is owned by an irrevocable trust), the proceeds will generally not be includable in your estate for estate tax purposes. The single exception is a life insurance policy that was transferred to an irrevocable trust by its owner. In that event, the policy will continue to be included in your taxable estate until 3 years have passed from the date of transfer. This 3-year rule does not apply to policies on your life initially purchased by the irrevocable trust.

Making gifts is often a very effective way to reduce the size of your estate. Although all gifts are taxable, there are several gift tax exclusions of which you can take advantage. The first is the annual exclusion (also called the annual per donee exclusion), which exempts annual gifts of $12,000 (indexed for inflation) per "donee." Simply put, each individual can make gifts of $12,000 per year to an unlimited number of people. Thus, if you have 3 children, you can make a gift of $12,000 to each of them this year and then again each year thereafter. Each of those gifts qualifies for the annual exclusion. If you are married, each spouse can make such gifts, resulting in total gifts of $72,000, without gift tax consequences. You also have a lifetime gift tax exemption of $1,000,000. So, in addition to the annual exclusion gifts mentioned above, you may make gifts totaling the gift tax exemption amount during your lifetime. If the exemption is used during life, it will not then be available for transfers at death. From a tax perspective, however, lifetime gifts are almost always more advantageous than gifts at death, because (i) gifts are tax exclusive while bequests are tax inclusive, (ii) as the money you give away grows in value, that value is also outside your taxable estate, and (iii) any income earned by the gifted funds is income to the recipient, rather than being income to you. An effective use of your annual gift tax exclusions and your lifetime exemption is to give away assets that have a low value while you are alive and a much higher value at death. The prototypical asset that falls within this category is a policy of life insurance. During your life, a life insurance policy has a relatively low value, but at your death, the full death benefit will be subject to the estate tax. Making gifts to irrevocable trusts, such as a Grantor Retained Annuity Trust, can also effectively leverage your gift tax exemption by allowing you to give away more than the actual value of the gift.