Estate Planning: Protecting Your Family,
Providing for Your Wishes
This discussion
provides a broad general overview of the relatively complex issues in estate
planning and is not intended to provide you with specific advice. Everyone's
personal and financial situation is unique. It is important that you consult us
to advise you on the latest developments in this field or if you have specific
questions or need advice on estate planning strategies.
Everything you own at
the time of your death may be considered part of your estate, including your
home, bank accounts, insurance policies, and any of your other assets. Have you
ever stopped to think about what will become of all that when you're gone? Don't
assume it will be distributed according to your wishes. The fact is that if you
haven't done the necessary planning, you don't have much control over what will
happen to your estate after your death. A carefully developed estate plan can
help make the transition to a life without you easier for your family.
1. What
Does Estate Planning Entail?
Estate planning involves the development of strategies for protecting your
assets, distributing them according to your wishes, and otherwise providing for
your family. A carefully developed estate plan can help you to accomplish many
estate planning goals, such as the following:
Minimize
the taxes on your estate and maximize the inheritance for your beneficiaries.
Provide for the special needs of family members. Ensure the continued operation
of a family business. Appoint a guardian for minor children. Ensure the
availability of cash to pay necessary taxes and administrative expenses. Bypass
probate administration for your estate.
The most critical
component of an effective estate plan is a properly prepared will — one that
transfers your assets in accordance with your wishes. Additionally, you must
consider the probate process and the possible tax liabilities of your estate.
This process can involve in-depth financial projections and estate tax
calculations. Depending on your individual situation, estate planning may entail
naming guardians for your children, creating trusts, special titling of assets,
and other activities.
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2. Your
Will
Writing a will protects your family and ensures that your wishes will be carried
out. Anyone of legal age with any property should have a will. If you die
without a will, or what is known as intestate, your estate will be distributed
as determined by state law and administered by someone appointed by a court. In
addition, the court will decide who will care for your minor children. Dying
intestate also can increase the tax burden for your heirs and cause dissension
within your family. A will enables you to:
Provide
for future management of investments or a family business. Designate guardians
for your minor children. Select the person you want to distribute your estate,
eliminating the necessity of an expensive, court-appointed administrator.
Minimize taxes and administration expenses in the settlement of your estate.
Provide for special desires, such as charitable contributions.
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3.
Naming An Executor.
An executor should be named in your will to see that its provisions are carried
out. Select someone you can trust and who has both the time and the financial
know-how, since he or she must oversee the probate process and will have many
responsibilities, including the following:
Collect
any money owed to you. Pay your debts and expenses, as well as those of your
estate, including funeral expenses, tax liabilities, and administration
expenses. Notify life insurance companies of your death. Sell assets as
necessary and invest others prudently to provide income during the time that the
estate is being administered. Prepare and file all necessary tax returns for you
and your estate. Distribute the estate to the people named in your will. Account
for all receipts and disbursements of the estate.
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4.
Naming Guardians.
A similar approach to child-raising is an important factor to consider when
selecting guardians for your minor children. In addition, you may want to
discuss possible guardians with your children and use their views in forming
your decision. If you are seriously concerned with the financial discipline of
prospective guardians, consider naming a separate trustee to manage the money
and property left to the children. In most cases, however, it is wise to select
guardians who will not only love and care for your children, but who are
financially responsible as well.
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5. What
Is Probate?
Probate is the legal process of identifying and distributing your probate assets
(any assets in your estate that are not transferred automatically or in trust)
to the appropriate beneficiaries. If you have a will, the process includes
proving that the will is valid and ensuring that assets are distributed
according to its provisions. Otherwise, the probate court will oversee the
distribution of your assets according to your state's intestacy laws. The
probate process is a matter of public record and can be costly and time
consuming. There are many estate planning strategies that enable you to avoid or
bypass the probate process. These strategies typically involve providing for the
transfer of your assets through joint ownership, trusts, or gifts while you are
alive, instead of through a will. Although avoiding probate may be beneficial in
terms of time, money and privacy, bypassing probate does not eliminate or reduce
estate taxes.
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6. How Long
Does Settlement Take?
An estate not subject to probate may be
settled relatively quickly. In contrast, a probate estate takes time to settle
because there are so many variables involved. For example, creditors must be
allowed an opportunity to come forward and file any claims. A simple estate may
take three months to a year to settle; a complicated estate two to three years
or more. However, in special circumstances, preliminary distributions may be
made from your estate during the settlement process. Note that a complicated
estate subject to probate or not, can have a lengthy settlement process.
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7.
Life Insurance
Life insurance is an essential estate
planning tool because it provides immediate cash for survivors. Since proceeds
are readily available, life insurance protects your family from being forced to
liquidate some of your other assets to meet living expenses. Life insurance can
also help your survivors pay debts, including estate taxes. Generally, insurance
proceeds go directly to the beneficiary and do not have to go through the
probate process.
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8.
Tax Considerations
Federal estate taxes and state death
taxes are complex and can significantly decrease what your beneficiaries
ultimately receive. It is advisable to consult with a professional financial
adviser, such as a CPA/PFS, for information on estate, inheritance, and gift
taxes on both the federal and state levels. The following are some basic estate
tax planning considerations of importance.
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9.
Unlimited Marital Deduction
You may leave an unlimited amount of
assets to your spouse (who is a US citizen) without any estate tax liability.
However, when your surviving spouse dies, tax may be charged against his or her
estate, which would include the assets received from your estate. This may
result in a larger estate tax than would be the case if you both make good use
of the unified credit, discussed below.
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10.
Unified Credit
Individuals are entitled to a lifetime
unified estate and gift tax credit that effectively exempts from the tax
transfers up to a specified amount. The amount exempted — the applicable
credit amount is $1,000,000. Estates valued at less than the applicable credit
amount pass tax-free to beneficiaries.
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11.
Transfer Tax Rates
An estate tax return must be filed if
your taxable estate exceeds the applicable credit amount. Estates over this
amount are taxed at rates up to 49% in 2003 (49% in 2004) .
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12.
Gifts
Gifts are a classic way to reduce an
estate and the related taxes. You are allowed to make yearly tax-exempt annual
exclusion gifts of up to $11,000 per recipient or up to $22,000 with your
spouse's consent. Making gifts in excess of the exclusion amounts will have an
impact on the lifetime unified credit and gift and estate taxes. Reminder: Only
gifts of a present interest qualify for the annual exclusion. A gift of a
present interest is one that the donee has immediate access to.
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13.
Setting Goals And Getting Started
Developing a suitable estate plan
requires setting concrete goals. Think about who you want to provide for and how
this should be accomplished. Of course, identifying your estate planning goals
is only one component of the estate planning process. However, your goals become
the framework for undertaking other activities, such as the following:
Taking inventory of
your assets and deciding on the appropriate form of ownership.
Preparing
your will and other legal documents.
Reviewing insurance coverage.
Estimating tax liabilities and the net estate available for distribution.
Evaluating alternative strategies and identifying those that will help you to
meet your goals.
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14.
The Time To Start Planning Is Today
It's important to have a coordinated
set of estate planning strategies in place as soon as you have acquired assets
or become legally responsible for minor children. In addition, it is critical to
review these plans from time to time. The effectiveness of strategies made last
year or even today can be impaired by changes in your personal situation, your
finances, and tax or inheritance laws. Once you've developed a plan designed to
accomplish your goals, you should review the plan annually to ensure that it is
still effective. A professional adviser, such as a CPA/PFS, is well-versed in
the latest developments and planning ideas and can help you analyze your
situation, develop the strategies to help you achieve your estate planning
goals, and work with your attorney and other financial professionals to
formulate an estate plan that is right for you.
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