To ensure that their children will enjoy these savings, the spouse should have a credit-shelter trust in his or her estate plan. Also, each spouse should have assets valued at the exemption equivalent amount in his or her own separate name to leave to those trusts.

A word of caution: to maximize the advantages provided by the 2001 tax law, a review of all will, trusts and any other estate planning documents is in order.

As the new exemption limits go into effect, wills that mention a $600,000 or $1 million figure, for example, may need to be rewritten, and individuals who have carefully divided their assets so that each spouse has at least $1 million in assets may have to adjust their holdings. The increase in the exemption amounts means that, with proper planning, married couples who can exempt $2 million of assets today could exempt $7 million in 2009.

Transferring Gifts. Another way to reduce estate taxes is by making lifetime gifts. Individuals can reduce the size of their estate by giving $11,000 worth of assets each year to as many people as they want, without eating into the $1 million exemption. A husband and wife can transfer $22,000 this way every year-$11,000 per parent-to each recipient. The tax law adjusts the $11,000 annual exclusion for inflation every year.

Once they make such a gift of cash or other assets, any future appreciation is also removed from their estate and escapes federal estate taxes. That's why they may want to consider giving assets away that are expected to increase in value between now and their death. It may mean a bigger tax savings.

Life Insurance Trust. Life insurance proceeds become part of their estate and are subject to estate taxes if they own the policy or have incidents of ownership in the policy at their death. But by setting up an irrevocable trust and making it the original owner and beneficiary of clients' insurance policy while they're still alive, the proceeds may be kept out of their estate, which means tax savings.

After the trust is established, clients can make annual payments to the trustee who, in turn, can pay the premiums. The proceeds of the policy may be held in trust and made available to provide income to their spouse and children, or anyone else they designate in the trust document. The cash in the trust may be used to pay estate costs on a very tax-efficient basis.

Entrepreneurs tend to be do-it-yourselfers. But estate planning is an area where the solo approach could be risky; there are many ways to run afoul of the rules. In planning their estate, business owners should seek the advice of an experienced financial planner who is knowledgeable about closely held businesses. Saul M.

Simon CFP, CFS, RFC, is president of the Simon Financial Group in Piscataway, N.J. He can be reached at [email protected].

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