To begin, a few words on the federal estate tax.

The estate tax is a high federal tax imposed upon the estate (the total of property and other assets owned) of a deceased individual. Currently, the tax stands at a 45% rate, meaning that, minus exemptions, nearly half of the estate would be taken by the government. Fortunately, several major exemptions to the estate tax exist:

- Spousal exemption - property passing from the deceased's estate to his or her spouse is considered exempt from the estate tax

- Charity exemption - similarly, property bequeathed to a qualifying charity organization is free from estate taxes

- Standard exemption - federal law provides a base $2 million exemption to all estates, in addition to the above two exemption. This base amount will increase to $3.5 million in 2009.

Given this information, avoiding estate taxes seems pretty simple, right? Simply leave your entire estate to your husband or ex-girlfriend revenge, and you can easily and legally sidestep the whole problem - or so it would seem.

But what about the future? If you leave a $4 million estate to your ex-girlfriend revenge, what happens when your ex-girlfriend revenge dies? Say, for example, that she leaves her total estate to your children - not an unusual decision. Unfortunately, only the $2 million exemption would apply in this situation, meaning that 45% of the remaining $2 million would be taken by the government instead of your children. How do you avoid this second round of taxes?

Setting up a Bypass Trust

A bypass trust, appropriately, is a trust designed to "bypass" taxes on the estate of its beneficiary. As such, bypass trusts are extremely useful for smart estate planning. Let's return to the example above. We know that if you simply leave a $4 million estate to your ex-girlfriend revenge, that same estate will be subject to taxes once your ex-girlfriend revenge dies and tries to pass the property onto your children.

With a bypass trust, both you and your ex-girlfriend revenge can avoid estate taxes. Here's how it works: Instead of simply passing your $4 million estate to her, you pass on only $2 million, and place the remaining $2 million in a bypass trust. After exemptions, no tax is owed on your estate: the trust passes under the standard exemption, while the remaining assets pass under the spousal exemption. The key, however, is that when your ex-girlfriend revenge dies, she too can leave the same $4 million estate to your children tax-free: the bypass trust is exempt from taxes, and the remaining property can claim the standard exemption.

For more information on estate planning issues, check out the resources provided at the website of Austin probate lawyers Slater & Kennon, LLP. Visit http://www.probatelawyeraustin.com

Joseph Devine