M. D., of Flushing, N.Y., asked me this question:

My wife and I are going to have a happy problem. Our estate is worth over $1.5 million and we know there will be Federal estate taxes payable by our two kids upon our death. The home we've owned jointly for 28 years and my Keogh retirement plan are each about $500,000. The rest of our assets are jointly owned. What are your suggestions for keeping these taxes to a minimum?

Dear M. D.:

This should be everyone's biggest problem, and I have several suggestions.

I've previously discussed the use of a Unified Credit Trust by a married couple. The estate tax benefit is that each spouse will be able to support the survivor, while also utilizing their estate tax credit equivalent ($600,000), thus effectively sheltering that amount from Federal estate tax. In New York there is an estate tax payable on each estate over $115,000, and on $600,000 or less the tax is not greater than $26,000.

Basically, for the Unified Credit Trust, you try to divide your assets so that upon the first spouses death a trust with at least $600,000 is created. The Trusts income may be paid to the surviving spouse for their life. The survivor may be given the right to draw the greater of $5,000 or 5% of the Trusts principal balance, each year. Also, the Trustee may be given the right to draw principal for the survivors health, education, maintenance or support. There should be no income tax consequences on either of the principal distributions. Keep in mind that any of the above rights may be restricted, but if they are relaxed the tax benefit will probably be lost. Upon death of the surviving spouse, the remaining Trust principal passes estate tax free to the named remainder beneficiaries, probably the kids or their kids.

Because each spouse will now utilize their $600,000 estate tax credit equivalent, they may shelter $1.2 million from the tax. For estates greater than that, there are various methods to reduce the potential tax bite. You may currently gift funds, to the kids directly or in further trust, at $10,000 per donee per year, or to a charitable trust (especially useful with highly appreciated assets). Another method is the use of an Irrevocable Life Insurance Trust which provides cash for payment of the tax due, but the cash is received tax free, essentially and simply restoring the total estate to its value before the tax.

The Keogh presents an obstacle because it should have your wife named as primary beneficiary; she will save income tax on its distribution. In this estate, that leaves $1 million total or $500,000 per spouse. Depending upon health and other issues, further tailoring may be done; however, my strong suggestion is that the non-Keogh assets be placed in sole ownership of each spouse equally. Bank accounts and stock holdings may be divided evenly, using new accounts. Your home should be retitled to each of you as Tenants in Common. In this way, whichever spouse is first to go, they will have used $500,000 of their credit-equivalent, a significant tax savings.

Tax reduction is a goal which Estate Planning tries to achieve; not everything is attainable. To get the results you intend, it's best to consult with a professional. For more information on estate planning issues, pre- or post-mortem, contact an attorney or other professional in your area who specializes in this field.