Minimizing estate taxes and transfer costs while providing the greatest  possible  financial  security  for  your  heirs  and  beneficiaries defines estate planning. This is a very goal-oriented portion of financial planning. One of the main challenges for estate planning is to achieve a high standard of living in your retirement plus preserving as much of your assets as possible to pass on to the next generation. As part of the inheritance maximization, estate planning tries to minimize the amount of estate taxes your beneficiaries will have to pay. Excessive estate taxes pose a major problem to many estates, and in some cases, may even be eliminated!

Also included as part of estate planning are ensuring that your assets go where you want them to, simplifying the transfer of your assets to your beneficiaries, and minimizing family conflict. A death can do strange things to the surviving family. I have seen more than one family torn apart after the death of a loved one. By providing a plan that specifies where your assets are to go, you won’t be making the executor of your estate the “bad guy.” Family bitterness and jealousy are only two things that can be prevented by proper estate planning. You can also avoid leaving family members with financial insecurity and illiquid assets, leaving assets to minors who are incapable of handling them, and having improper distribution of your estate.

Estate planning can be as simple as a living trust and a will. Or, it can involve gifting and charitable remainder trusts. The more assets you have, the more important estate planning becomes. For those people with a high net worth, estate planning is especially important. But there are also a number of people who are in dire need of estate planning and may not even know it. Couples who are not married must do some estate planning, if they hope to provide for the surviving partner after the other’s death. The courts will not take special consideration if these couples haven’t put their desires into legal documents.

ESTATE TAXES

During the year 2001, Congress passed a large tax cut for the American people. As part of that legislation, they also overhauled the estate and gift taxes, making estate planning much easier for Americans, including eliminating the estate tax by the year 2010. Congress has also enacted a declining scale for the generation skipping tax (GST), concluding with its eventual repeal in the year 2010. However, the gift tax will be sticking around. While these taxes are being phased out and even eliminated, the new law has a sunset provision, just like the income tax portion of the tax cut. If Congress does not enact a new law upholding these changes during 2010, the tax laws will be restored to present conditions. That is, the GST and estate tax will be reinstituted in 2011.
But, until then, we will enjoy new, and lower, estate tax laws. Beginning in 2002, the top gift and estate tax rate will be 50 percent, which is down from 55 percent. Plus, the old five percent surtax (on cumulative transfers between $10 million and $17.184 million) will disappear. As time goes on, the top tax rate will continue to decline until 2010, when the estate tax disappears and the gift tax tops out at 35 percent.

New Top Gift and Estate Tax Rates

While the estate tax rates continue to drop, the threshold at which the estate tax is imposed continues to go up. The maximum amount allowed without triggering estate taxes (the exclusion amount or unified credit) was  $675,000 during 2001. The exclusion allowance means that you could give your beneficiaries up to $675,000 tax free. Anything above that amount was subject to an estate tax of between 37 and 55 percent. That rate was supposed to increase gradually until 2006, when it was scheduled to top out at $1 million. Now, the exclusion amount for the year 2002 is $1 million, increasing every year until  2009. Then the tax will be repealed in 2010. Unfortunately, many people don’t understand that the estate tax will only be gone for just that one year. Barring any action from Congress, the estate tax will be reinstated in 2011 at the $1-million exclusion allowance.

    As far as state taxes go, many states base their estate and inheritance taxes on the amount of the federal credit allowed for death taxes paid to a state. The new tax law not only modifies the credit, it also phases it out. Some states, including California and Florida, are prohibited by their state laws to enact an inheritance tax, but most states aren’t. Whether the states will individually step in and enact their own inheritance taxes remains to be seen. But if they do, they will each be able to establish their own exemptions and tax rates, as well as define what can be taxed.

The first step to estate planning is to write your will. The next steps are all based on whether you and your financial planner think that you need any form of advanced estate planning. Remember, estate planning is not based on your need now; it’s based on what your estate is
estimated to be worth years from now. Perhaps a will is all you will need, especially if you believe that you will not live past the year 2010. But, you may find that you need much more than just a will.

DO I NEED A WILL?

As a matter of fact, yes, I would say you probably need a will. A will is the simplest way of transferring your property to someone else (your beneficiaries or heirs) after you die. It will also name the people (the executors) who you want to carry out your wishes. Most people are advised to make out a will as soon as they have some sizable assets, but since “sizable” is a subjective term, I advise people to have a will if they feel that they have property that they would like to give to someone. Certainly by the time you have children, you should have a will, as you will be able to name your children’s guardian in your will.

Special note: Many investment companies will ask that you name a beneficiary for your accounts when you open them up. Usually, you will be allowed to name as many beneficiaries as you want. For nonretirement accounts, ask that your account be a Transfer on Death account, which will allow you to place a beneficiary on it.

If you were to die without a will, you would be dying intestate. When you draw up a will, you reserve the right to decide how your property will be divided. By dying intestate, you are giving the courts the right to split up your property. This means that no matter what you promised people while you were living, the chances of those wishes being carried out are pretty slim.

Another problem for the beneficiaries of someone who has died intestate is that the courts will usually divide the property up according to living, lawful relatives in equal shares. You will lose control of your property, and it may wind up that your Aunt Bertha, who you intensely dislike, will receive a bulk of your estate, while your best friend since childhood receives nothing. Deathbed promises are not upheld in a court of law. And, if you die intestate without any heirs (in this case, family), your estate will pass to the state. The importance of a will shouldn’t be overlooked. We have strived to have control over our property and assets while we are alive. Why should we give up that control after we have died?

If you already have a will, you may need to go back and review it.  Many times, I have seen clients get divorced but never change their wills. If they were to die today, their ex-spouses would receive their assets. Plus, recently there have been a number of changes with the  tax  laws, especially  regarding estate  taxes. Wills  should be reviewed every two to three years, unless something major (i.e., the birth of a child, or remarriage) occurs before that. If you haven’t reviewed your will for a while, do so now.

Sometimes my clients don’t want to leave certain family members any of their estates. Who you choose to leave an inheritance to is your decision, and if you feel that you want to disinherit someone, that’s your choice. You can cut out any person, including immediate family members, simply by leaving them out of your will. You may want to specify in your will which people you don’t want to inherit anything. This will make contesting your will much more difficult. Or, you can simply leave them just a few dollars. This will definitely get your point across.

As far as disinheriting spouses, ex-spouses, children, and grandchildren, the rules vary. For spouses that live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), the law assumes that your spouse owns one-half of everything you both earned during your marriage. But by both of you signing a legal document that states which property belongs to which person, you will be able to decide where your assets go upon your death. In noncommunity property states, your spouse legally has the right to claim one-fourth to one-half of your estate, regardless of what your will states. However, this provision usually kicks in only if your spouse contests your will.
If you are worried that your ex-spouse may try to claim part of your estate after your death, don’t be. Unless they have a claim against your estate prior to your death (i.e., a qualified domestic relations order, a court order that awards a portion of your retirement or pension benefits to your ex-spouse), that person won’t be able to lay claim to anything. But, it will also depend on how things were divided during the divorce.

Should you choose to disinherit any of your children or grandchildren, all you need to do is specify your wishes in your will. But just because you leave them out accidentally, doesn’t mean that they won’t receive anything from your will. Many states have laws that protect  against  accidental  disinheritance. This  way  if  you  don’t update your will, and you have had an additional grandchild or two enter the picture, they won’t be left out. Legally, unless you say that your child or grandchild is not entitled to any of your estate, they are eligible to receive the same share as your other children and grandchildren if they contest your will.

LIVING WILLS AND PROXIES

There are a few other estate planning tools that you should consider having. The first is a living will, which tells your doctors what your wishes are concerning life support. If you don’t want to be kept alive by a life support machine, you will need this document; otherwise, your doctors are bound by their oath to do whatever it takes to keep you alive. Second, you may want a health care proxy or power of attorney. This will authorize someone you trust, usually a close family member, to make medical decisions for you in the event you are unable to communicate your wishes. Finally, you should consider a durable power of attorney, which will allow whomever you choose to make any kind of financial decision for you. If you have a trust, or plan to set one up, you may want a separate power of attorney section inside the trust. Some financial companies require that the durable power of attorney be stated within the trust and may not accept a separate power of attorney. However, you may still name the same person as your power of attorney.