What is an Estate Exemption?

The estate exemption rule means that residents of the United States have the right to transfer up to a specific amount to their heirs -- those individuals designated in the individual's will who will receive the assets -- without the gift being subject to an estate tax levied by the Internal Revenue Service. This rule is especially relevant for people who have accumulated a significant estate during their lifetime. The amount that can be transferred on a tax-exempt basis is set by the U.S. federal government.

From 2006-2008, a person could leave up to $2 million US Dollars (USD) in bequests to another individual on a tax-free basis. The estate exemption limit goes up to $3.5 million USD for 2009, and there is a plan being discussed to eliminate federal estate taxes entirely after that point.

Until estate taxes are eliminated, there are some strategies that married couples who have accumulated a significant amount of assets can use to ensure that more of them reach the people they designate, as opposed to going to pay estate taxes. If the couple has children, they can get the maximum benefit possible from the estate exemption by setting up a bypass trust.

The bypass trust works to give the heirs an estate exemption in the following way: When one of the couple dies, $2 million USD -- which is exempt from federal estate taxes -- is placed in the trust. This amount of money is held in trust to benefit the children at a later date. The balance of the estate would be transferred to the surviving person of the couple to use or dispose of as they wish.

When the surviving spouse passes away, the children -- who would presumably be the heirs set out in the deceased's will -- can receive up to $4 million USD in assets without having to pay any estate taxes. $2 million USD worth of tax-free assets are transferred from the bypass trust, and the other $2 million USD would come from the parent's estate.

People who would like to get more information about the estate exemption rule or bypass trusts should consult with a licensed attorney and an accountant. These trained professionals have the expertise to advise their clients about these options for keeping their hard-earned assets out of the hands of the Tax Man. The estate exemption is a welcome rule for people who feel that they paid enough taxes while they were alive without having their estate taxed after their death.