Mr. and Mrs. Richards entered their lawyer's office with measured confidence. Their latest quarterly investment statements showed a strong uptick in their portfolios, the neighbor's house had sold for a bit more than listed, and Mr. Richards had just heard that the planned layoffs at his company had been canceled. They were still concerned about what the future might hold, but were cautiously optimistic.

They shook hands with their attorney and seated themselves around the conference table in front of steaming mugs of freshly brewed coffee. After a few preliminary pleasantries, Mrs. Richard addressed the topic of discussion.

"We're here for new wills. Our old ones were done when we were younger and our two kids were just babies. Now they're married with kids of their own. We still want everything to go to our kids, but they're old enough that my brother doesn't need to hold the money in trust now."

"Yeah," Mr. Richards chimes in, "then, we were worried about what would happen if we died too soon. Now, we just want to be sure we're taken care of, and that the kids get their inheritance.

"Oh, and we want to take care of our dogs, too. Now that the kids have moved out, the dogs are like our children – but our real children won't take them. My son's wife is afraid of dogs, and my daughter is allergic to them."

Their attorney nods commiseratingly. "Tell me about what you own. What's in your estate?"

Mrs. Richards pulls out a sheet of paper and hands it to him. He scans it.

"So, your house is worth about $350,000 and your IRAs and 401(k)s total around $500,000. I see other investments and bank accounts in the $150,000 range. How current are those values?"

"As of a few weeks ago," says Mrs. Richards. Her spouse adds, "That's still down from a couple of years ago, but definitely up from last winter."

"A good thing," opines their attorney.

"Now, here's one issue for you to consider. Since you live in Maryland, your estate is just at the Maryland estate tax threshold. If your estate is over $1.0 million, you'll have to pay Maryland estate tax – or, your kids will, since you'll be dead.

"Right now, the federal estate tax exemption is $3.5 million, so that's not your problem – yet. But the President and Congress haven't done anything yet to keep the estate tax exclusion from going back down to $1.0 million in 2011. In 2010, the federal estate tax is repealed, for a whole year. Then, it comes back in 2011 with a $1.0 million exemption.

"So, if your estate grows at all, you'll have to pay both Maryland and federal estate tax at the death of the second to die of the two of you. That's not a pretty picture."

Mrs. Richards asks, "how much is the tax?"

"At $1.5 million," replies their attorney, "the Maryland estate tax is $63,500 and the federal estate tax – if the exclusion is $1.0 million – is $210,000, so the total tax bite is just under $275,000. That's an approximation, of course.

"Nobody knows what Congress will do about the federal estate tax, but with the government handing out money like it grows on trees, it's not likely that the estate tax will ever go away. President Obama indicated during the campaign that he was comfortable making the $3.5 million exclusion permanent, but I wonder if the government will feel able to afford such a high exclusion now that the federal debt has risen so much."

"What do we need to do?" asks Mrs. Richards. "The total estate tax is almost thirty percent!"

"So you think your estate is going to grow?"

"I sure hope so," she replies.

"Well, if I were you, I'd use trusts to avoid the estate tax. The same trusts can make sure there's money set aside for your dogs, too, under the new Maryland pet trust law. Let me put a diagram on the whiteboard . . ."

Next issue: Trusts to Avoid Taxes and Provide for Pets.