Dear Len & Rosie,

Our parents set up an A/B trust. Dad died in 2003. Mom is 87 and reasonably healthy. Both the survivors trust and the bypass trust hold real estate properties. Our attorney prepared a spreadsheet showing values of assets (mostly rental properties) as of our father’s date of death. The survivors trust is valued at $1.8 million and bypass trust is about $1 million. We understand there could be taxes until 2009 when the rules change. Should we leave things alone? Should we consider a family partnership? Should we reduce the value of the survivors trust through gifting to children and grandchildren? Our mother is open to whatever makes sense, to avoid paying taxes to the government. She is reasonably healthy and we think and hope she’ll live a long time.

Chuck

Dear Chuck,

It looks to us that, at the very least, your parents had the right idea when they created their trust. The million dollars of assets that were allocated to the bypass or “B” trust of your parents A/B trust will be completely exempt from federal estate tax on your mother’s death. This could save your family from having to pay as much as $500,000 in death taxes when your mother passes away. They did good, didn’t they?

Today, $2 million can pass free of estate tax upon your mother’s death, and she has less than that right now. She’s in a very good position.

However, the future is not clear, because of the manner in which the 2001 tax act was passed into law.

Currently, the amount of a decedent’s assets that can pass free of death tax will increase to $3.5 million in 2009, and the federal estate tax will be eliminated in 2010.

The problem is that the law phasing out the estate tax has a 10 year expiration date. In January 2011, the estate tax limit will drop to $1 million. If your mother dies then, your family will have to pay about half of her assets above the first million.

So what are you going to do about it? Many people are taking a wait-and-see approach. Congress has been debating this issue for years but unable to reach a compromise.

Chances are, there will be a permanent estate tax reform law that will likely allow at least $3.5 million in assets to pass free of estate tax. But we cannot guarantee this.

If your mother can afford it, she can make gifts to her children and other family members in the amount of $12,000 to each person annually. But she should never give anything away that she may need for her own purposes.

It’s also possible for your family to create a family limited partnership to manage your mother’s investments. Assets owned within a partnership formed by your mother, the children and other family members can get discounts on your mother’s estate tax return upon her death.

Len & Rosie

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, 996-4505, or  www.lentillem.com. Len also answers legal questions each weekday, noon-12:45 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.