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This report 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:
- Provide for an orderly transfer of your property in
accordance with your wishes.
- 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.
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2. Your Will
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.
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:
- Distribute your property as you wish, including
personal property of sentimental value.
- 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:
- Prepare a complete inventory of all your assets.
- 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
$1,500,000. 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 2004.
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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/CFP, 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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