Dear Mr. Premack: My wife and I have Wills with A-B trust plans created in 1993 when our estate value was slightly over the estate tax exclusion amount. Now, at ages 68, our estate is about $1.8 million. With the higher estate tax exemptions that are in effect today, we are no longer concerned about estate taxes. Most of our assets are in JTWROS to each other. Should we eliminate the AB part of our Wills now that the estate tax exemptions are higher? — Anon

Back in 1993, federal estate tax law was structured to exempt the first S600,000 of an estate. Anything above that was taxed at 50%, so the estate tax hit a lot of people and cost a lot of money. If, for instance, your assets had been $500,000 back then, the tax would have been imposed on the $200,000 that exceeded the exemption (and your estate would have paid $100,000 in tax, adjusted for various deductions).

The exemption was scheduled to increase very slowly. For instance, by year 2000 it had reached $675,000. Because the estate tax applied so widely and hit so hard, A-B trust planning became fairly common. The goal of that type of plan is to double the available federal credit by bypassing the first spouse to die, sheltering more assets from tax with the trust.

An A-B plan can be called a "bypass plan", a "shelter plan" or a "federal credit" plan. All the labels applied the same idea: the law grants the tax exemption to all individuals, so a married couple really has two exemptions. But if that couple's Wills are written to say, "When I die, I leave my estate to my spouse" then the exemption of the first to die is never used.

By contrast, if the Wills are written to say, "When I die, I leave my estate to a trust for my spouse's benefit" then the exemption of the first to die is applied against the assets going into that trust. Later, when the second spouse dies, the exemption of the second spouse applies to the assets outside the trust. In year 2000, this would exempt $1.3 million from estate tax.

In year 2001, Washington made a big news splash about a new law that phased out the estate tax. Indeed, the exemption was increased to $1 million (so a couple with an A-B trust could shelter $2 million from tax). In 2008, the exemption has ramped up to $2 million. Next year it will be $3.5 million and in 2010 it will be unlimited, so no one who dies in 2010 will pay any estate tax.

The shocking reality, however, is that Congress wrote the 2001 law to expire in 2011, as though it was never passed. Consequently, the exemption as of January 1, 2011 will go down to $1 million (which is where it would have reached by slow growth under the old system).

How does this apply to you? If you eliminate the A-B trust and one of you dies after 2011, your $1.8 million will have a tax of about $400,000. If you keep the A-B trust, then half of the estate is tax-free at the first death and the balance is tax free at the second death. The reduced $1 million exemption creates a risk of higher taxes, but the risk is eliminated by your A-B trust -- so you should keep it.