I received this question from B.R., of Richmond Hill, N.Y., who wrote:

Please tell me what Estate Planning is for!

Dear B.R.:

As the old saying goes, two things in life are certain: death and taxes. Estate Planning is the art of insuring one certainty does not trigger the other.

One issue is asset depletion. Many people already know estates with a total value under $600,000 aren't subject to federal estate taxes, under current law. But even if your assets are worth less than $600,000 today, it's easy to underestimate, with inflation alone increasing asset value over time. And few people are familiar with the extent of the federal estate tax rules, with the possible result an unanticipated estate tax bill for survivors.

The IRS reported in 1986 that of nearly 46,000 U.S. citizen estate tax returns, there was an average federal estate tax of $136,956. (Source: Statistics of Income Bulletin, Spring 1990.) Further, corporate stocks, including the value of stock in closely-held companies, made up the single largest portion of the total gross estate, at almost 28%. This highlights the vulnerable position of business owners whose business interests often represent a large share of their total gross estate.

Besides depleting the assets, an unanticipated estate tax bill can require a substantial amount of cash which may not be available, particularly if an estate consists primarily of real estate (illiquid), shares of a closely-held business (no ready market), or the retirement benefits from an employer-sponsored pension plan (subject to income tax penalties if withdrawn early or in a lump sum).

Can the surviving family sell a home or business interest in time (and for a sufficient amount) to pay an estate tax bill? Should this be their only choice? Using cash or liquidating assets to pay estate taxes means the survivors lose the growth potential and income from those assets. Such considerations emphasize the importance of early and thorough estate planning. Both federal and state estate tax laws must be satisfied, as well as gift tax provisions. The laws are complicated by a long list of exclusions and deductions. Advice from a specialist in Estate Planning is important.

The first step in Estate Planning is determining your objectives for passing on the estate's assets. Next, you and your professional advisor estimate the taxable estate and decide how to fund estate settlement costs. The taxable estate may differ from what you consider the gross estate.

Inflation is another factor which impacts future estate tax liabilities. An estate which currently falls under $600,000 and can usually be offset by the Federal unified gift and estate tax credit, may increase in value within a relatively short time. It may even double, depending on the rate of inflation and the contents of the estate.

A well-designed Estate Plan will adapt to inflationary changes. Periodic reviews will insure that your original plan continues to meet your family's estate tax needs.