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Your estate could easily exceed the $5 million tax exemption

One of the biggest questions people have about estate planning - especially tax planning - is whether they need it. Many people in New Jersey think they are not rich enough to warrant estate planning. However, upper middle-class individuals can be slapped with a heavy tax penalty - a 35 percent federal estate tax.

The law currently allows individuals a $5 million dollar exemption. While that may seem like an extravagant amount of money for the average working American, it is not hard to exceed that limit. People who invest in life insurance, have a great deal of equity in their homes or have comfortable retirement accounts could easily surpass that amount. So how do you know if you're on track to die with more than $5 million in assets?

An article in The Wall Street Journal explains that for the purposes of estate tax, the value of your estate includes a variety of assets - proceeds from life insurance policies, your home, vacation home, retirement accounts, investment accounts, cars and other valuables from your home. If you have any ownership rights in a private business, that is also included in the total.

For most single people, life insurance coverage is the most common cause of an unexpected subjection to the 35 percent federal estate tax. For married couples, that is often less of a problem, since the insurance benefits are passed on to the surviving spouse without tax penalties. If you are not sure whether your estate will exceed the exemption, it can be beneficial to work with an estate planning professional. Meeting with an attorney is not free, but it will likely be less expensive than a 35 percent tax on your estate.

Source: The Wall Street Journal, "Think You're Estate-Tax Exempt? Maybe Not," Bill Bischoff, 17 February 2011

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