Under current estate tax laws, a taxable estate over $2 million is taxed at 46 percent; this exemption increases to $3.5 million in 2009. The estate tax won’t affect deaths 2010 but, unless Congress acts, this tax exemption drops to $1 million in 2011.
In any year, you can leave everything you own to a surviving spouse, free of estate tax. However, when you leave everything to a spouse, you may bulk up the estate of the second spouse to die, generating a tax liability at that death. Often, attorneys advise using a “bypass” trust, which allows an amount up to the estate tax exclusion amount to be placed in a trust that can provide support for a surviving spouse, but bypass his or her estate at your spouse’s death
Using such a trust, a husband and wife can pass twice the exclusion amount to heirs, tax-free. Using this relatively simple trust, a married couple could leave up to $4 million to heirs in 2006-2007 and up to $7 million in 2009. After that? It may be time to revise your estate plan, depending on what Congress does in the next three years.