New estate tax laws make it easier to leave more behind but create problems for some old wills.

Married couples with a total estate including life insurance of more than $700,000, may need new wills. Those with a living trust as a will substitute may need to amend it.

Here are two traps:

Your Spouse May Get Nothing. Failing to change a will or living trust could result in dividing an estate differently than intended. In the past, because the estate tax exemption phased up every year or so, more of a person's estate passed on estate-tax free.

For years, two problems existed: One was the exemption and the deduction for bequests to a spouse overlapped. To illustrate: The exemption is $1million and you have an estate of $1.5million. If you bequeath all of this to your husband, there will be no tax in your estate because spousal bequests are deductible. But this will add $1.5million to his estate. This was corrected by bequeathing half a million to him and $1million to a trust for him, then only half a million would be added to his estate.

The other problem is the exemption amount increased every year or so. To solve both problems, wills in effect said when you die you want to put aside in a trust for your husband (or give to your children) whatever the law exempts.

Previously the law phased the exemption up to $1million. The new law, however, phases it up to $3.5million. So wills sending the exemption to the children (or a trust) will send as much as $3.5million in 2009. To illustrate: Your will says the exemption goes to your children with the remainder to your husband, and you have a $3million estate. If you died when the law exempted $1million, your children would get $1million, and your husband would get $2million. Now assume instead you die in 2009. Then, because of the exemption increase, your children get everything, and your husband nothing. This may not be what you intended.

Unexpected State Taxes. Failing to change either your will or living trust could subject your estate to a state inheritance tax. Many wills are written to prevent federal or state death taxes when the first spouse dies. Now after the federal law change, there may be some state inheritance tax.

Before the recent change, most state laws copied the federal exemption. As the federal increased so did the states. States aren't likely to copy this recent increase; most are caught in the worst budget shortfall in a decade. This year many states exempt $700,000, the same as the old federal law. But this year the federal exempts $1million. The gap is $300,000.

As an example, assume you have a $1million estate. Your old will says the federal exemption goes to a trust for your husband. If you die now, $1million goes into that trust. But if your state allows only a $700,000 exemption, $300,000 would be subject to state inheritance tax.

A revised will should mitigate the problem. (more at Estate Planning)

THE MORAL: Where there's a will, there's less estate tax.

Released 4-22-02