TAKE STEPS TO REDUCE ESTATE TAXES (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

You probably don't sit around thinking about estate taxes. After all, you've got other things with which to occupy your mind. Also, you may have heard that only people with really big estates will incur estate taxes.

It is true that, in the year 2000, you can pass on up to $675,000 to your heirs, free of federal estate taxes. (Over the next several years, this figure will gradually increase to $1 million.) But the $675,000 figure includes virtually all your assets -- savings, investments, retirement plans, home, death benefit of insurance policies. Many, if not all, of these assets will appreciate significantly over time.

So, just because you are under the estate-tax threshold, there's no guarantee you'll stay there. And once you get past the allowable limit, your heirs will pay estate taxes of at least 37 percent -- and possibly up to 55 percent.

To reduce your future estate taxes, take action now. You can start by determining how large an estate you are likely to have. A qualified financial professional can look at your current assets, make realistic projections concerning future growth and arrive at a reasonable estimate of your estate's ultimate value. Armed with this knowledge, you'll at least know how likely it is that your heirs will face estate taxes.

If it appears these taxes do loom ahead, what can you do? One possible strategy involves setting up a trust, either in a will or, as in the example that follows, in a revocable living trust.

Suppose you and your spouse have a combined estate worth $1.35 million. When you die, you can leave all your assets to your spouse, free of estate taxes, but when your spouse dies, the entire estate will be taxed -- and only one $675,000 estate tax exemption (your spouse's) will be available. Your exemption will no longer be in effect, and your heirs will have to pay estate taxes on the remaining $675,000.

However, you and your spouse can avoid this problem by setting up revocable living trusts that contain all your assets. If you die first, your trust will automatically split into two separate shares, sometimes called an "A-B Living Trust." Trust A goes to your surviving spouse, while Trusts B -- also called a "bypass trust" -- stays with your estate. Thus, your trust and your spouse's trust will each be entitled to the $675,000 exemption. When your spouse dies, the assets from both trusts will be distributed to your heirs -- with no estate taxes due.

Establishing this type of trust -- or any type of trust -- can be complex. Before doing anything, you will need to consult with your tax adviser and an attorney, preferably one with experience in estate planning.

Once you have everything in place, though, you'll be glad you acted. You might never be able to avoid all estate taxes, but, through careful planning, you might arrange for a more favorable outcome.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.