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Money Muse
Money MuseTax Season Focus: 10 Estate Planning Ideas
By Marko Tubic
Jan 31, 2002 -- Creating your estate plan is an important task for you and your loved ones. Only through careful planning can you be assured that you and your beneficiaries will be cared for as you desire. Here are 10 ideas for you to consider as you plan.Establish Your Objectives
Estate planning really is lifetime planning. It should focus on planning for life more than for death--your life, the lives of family and friends, and, finally, the lives of your heirs. Estate planning involves not only financial and tax matters, but also helping to make sure family members will be secure. Discuss your objectives with your professional advisors, who can help you implement the appropriate plan.
Create a List of Your Assets
In order for professional advisers to assist you in designing an effective estate plan, they will need an accurate list of the assets you own. Your investment representative can provide you with a "Personal Financial Inventory" sheet, a comprehensive checklist you can use when creating an inventory of your assets.
Minimize Administrative Details
When settling your estate, your family members may find themselves buried in a barrage of paperwork. Keeping your list of assets up to date will help, but all of your securities will have to eventually be re-registered, which can be time consuming, expensive and an administrative nightmare. Consolidate your assets and keep detailed inventory of your securities. More importantly, your survivors will only have to provide information to re-register your securities one time, and there is no charge for the service.
Draft a Will
A will is a written document that provides for the distribution of your property when you die. A will must go through probate. Wills are important because they allow you to determine how and to whom your assets will be distributed. If you die without a will, state law will govern the distribution of your estate. A will is also important if you have minor children, because it allows you to designate a guardian. Your will needs to be reviewed and updated periodically.
Reduce Your Probate Estate
Probate is a process whereby the courts help carry out the provisions in your will. The probate estate consists of assets titled in a deceased person's name. It does not involve assets that pass to a beneficiary by contract, such as a life insurance policy, or assets that are owned jointly with another person. Unfortunately, in some states, probate can result in additional cost and delay in the administration of an estate and a lack of privacy, since probate records are open to public scrutiny. With proper planning, you can keep the majority of your estate from probate and simplify the process for your heirs. Ask your advisers whether special planning techniques should be used to avoid probate.
Create a List of Your Assets
It's important to distinguish between your probate estate and your taxable estate. Your taxable estate consists of the value of your gross estate (the fair market value of all your assets), less any deductions. The estate tax is a transfer tax the U.S. government imposes on the assets or property you transfer to other people at the time of your death. These taxes can consume up to 55 percent of your estate. Discuss estate tax planning with your professional advisers.
Take Advantage of Estate-tax Exemptions
Under the law in 2001, you could transfer up to $675,000 in assets free of federal estate taxes upon your death. The amount of the tax exemption, called the unified tax credit, was to be gradually increased to $1,000,000 by the year 2006. However, a new law allows for death-time transfers of up to $1 million in assets free from federal estate taxes beginning year 2002, four years earlier than expected. The amount of the exemption is increased to $3.5 million prior to repeal of the estate tax in 2010.
For example, under the old law in 2001, if Mary Smith passed away in the year 2001 with a taxable estate valued at $1 million, her heirs would have had to pay estate taxes on the amount of Mary's estate that exceeded $675,000. Consequently, Mary's taxable estate would have been approximately $325,000. Under the new law, if Mary dies in the year 2002 with an estate valued at $1 million, her estate has no federal estate tax liability.
Plan For Incapacity
We've talked about planning for your survivors upon your death, but what if you are unable to manage your affairs while you are alive? A durable power of attorney allows you to designate someone to manage your financial affairs. This person is known as your attorney-in-fact. A health care directive, or proxy, can be drafted to allow someone to make certain health care decisions for you if you should be unable to do so for yourself.
Protect Your Assets With Insurance
Medical expenses in your later years can devour the estate you've worked so hard to accumulate. Even worse, you may end up drawing on your children's or family's resources as you struggle to pay for nursing home care. Long-term care insurance and life insurance can help. For example, life insurance can protect your survivors from the loss of your earning capacity and can provide cash for your family to help pay taxes and/or expenses when settling your estate.
Assemble Your Team
Now that you know some of the issues you should be considering as you begin the estate planning process, the next step is to put together a team of professional who can help you make decisions that are right for you. Use the tips that we've provided, and talk with your investment representative, your attorney and your tax adviser about your particular situation.
Marko Tubic is with the Fremont Edward Jones Office @285-1777.
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