Michael Jackson's Death and Your Estate Plan

After the quick-succession deaths of Ed McMahon and Farah Fawcett followed by the sudden death of Michael Jackson, 2009 is sure to be remembered as a notable year for celebrity mortality.

For the families of each of these stars dealing with the financial fallout of their deaths could be challenging. Reports indicate that Michael Jackson was some $400 million in debt, and Ed McMahon had a well-publicized foreclosure and mounting debts. The moral: Even the seemingly wealthiest and most successful among us are not immune from money problems.

But where death is concerned, 2009 is notable for another reason. To be brutally blunt, the death of a wealthy person in 2009 is a less taxing event than dying in 2008. That's because effective Jan. 1, the federal estate-tax exemption jumped to $3.5 million, up from $2 million last year. So you can now shelter up to $1.5 million more ($3 million more if you're married) from any federal estate-tax hit than if you had passed away in 2008. Yup, this is morbid. But it's favorable news to heirs of well-off people who die this year.

That said, you need to be careful. This leap in the exemption could throw your estate plan out of whack. Without a careful review of your arrangements, part of your estate could be allocated in ways you didn't intend.

But before I go any further, let me just make a plea to all of you who took a look at that $3.5 million exemption figure and decided this article definitely does not apply to you. Sure, $3.5 million sounds like an awful lot of money. But you might be a lot wealthier than you think. For federal estate-tax purposes, your estate includes your home (or homes), cars, retirement accounts, taxable investment accounts, collectibles and so forth.

Perhaps more important, the taxable value of your estate also includes death benefits from insurance policies on your life that you are considered to own. (If you have the power to change beneficiaries or coverage amounts, you own the policy.) With life-insurance coverage thrown into the mix, the odds are much higher that your estate exceeds the seemingly generous $3.5 million exemption. So if you don't already have an estate tax-savings strategy in place, now may be the time to create one. Consider the recent celebrity deaths to be fair warning that waiting is not a good idea. For assistance in getting started, see our estate planning section.

For those who already have an existing estate plan, here's how the larger 2009 exemption could affect you — along with some advice on how to avoid potential danger zones.

Married? Your May Be Funneling Too Much — or Not Enough — Into Your Bypass Trust

If you're married, your current estate plan may include a bypass trust arrangement. This common estate-planning tool is used to ensure that both you and your spouse take full advantage of your respective estate-tax exemptions.

The way most plans work is that an amount equal to the current federal estate-tax exemption automatically goes to a bypass trust when the first spouse dies. Typically, the trust beneficiaries are the children of that spouse.