Do you really need an estate plan? While many people believe they don?t have sufficient assets to bother with estate planning, nothing could be further from the truth. In fact, here are many good reasons to consider an estate plan, especially when you consider the personal and financial consequences of dying without a plan in place.
WHAT IS AN ESTATE?
Your estate is made up of all of your assets, minus any outstanding debts or other financial obligations you may have, including taxes, final expenses, and settling your estate, which is the cost of putting everything in order after your death.
Your assets include anything you own in your name, including bank accounts, real estate, life insurance, investments, and retirement accounts. Your assets can also include personal property, such as jewelry or art, a stamp or record collection, or pretty much anything of value.
Half of everything you own jointly, either with your spouse or someone else, is also part of your estate, including your share of any partnership or other business. Property you may hold in a revocable trust or custodial account that you created and for which you are the trustee or custodian is considered part of your estate, as is any money you?re owed.
The more you own, and the more valuable those possessions are, the more important an estate plan becomes. However, even if the total value is fairly modest, a plan is still important since of one the key reasons for estate planning is to determine who will inherit your assets.
WHEN THERE?S A WILL
Your estate plan will require at least one and often more than one legal document, including a valid will, up-to-date beneficiary forms for retirement savings plans and insurance contracts, and potentially one or more trusts to hold estate assets.
A will is the centerpiece of any estate plan. In addition to expressing how you would like your assets to be divided, a will typically appoints an executor or administrator to act as your personal representative and carry out the wishes that you have stated in the will itself. You?ll want to consider the choice of executor as carefully as you do the disposition of your property, especially if you have substantial assets. Naming a responsible family member or close friend is a common practice. Another approach is naming joint executors, one of whom is an attorney who could play primarily an advisory role.
If you have minor children, you will need to appoint a guardian to assume responsibility for their care in the event their other parent were no longer alive or was not willing or able to do so. In fact, that?s one important reason you?ll want to draft or revise your will as soon as you become a parent. If appropriate, you can also appoint a trustee to manage the children?s assets.
PROBING PROBATE
Probate is the process by which a state court determines whether your will is valid. Since state laws vary, and can be extremely strict about what constitutes a valid will, it?s essential to get professional advice and to create a new will if you move from one state to another. You may also need to make explicit provisions for children of a previous marriage.
If you don?t have a will, as is the case for two out of every three Americans, or if your will is declared invalid, the court divides your estate according to the state?s inheritance laws. Those rules may not reflect your own wishes or even what seems fair. If you want to leave assets to someone who isn?t a member of your immediate family or want to make a charitable bequest, neither of those things is likely to happen if left for the courts to decide.
USING TRUSTS
There are pros and cons to using trusts to achieve your estate-planning goals, so it?s a good idea to discuss them with your financial and legal advisers. Trusts aren?t always necessary in an effective estate plan. But because they are private rather than public documents and more difficult to contest than a will, they can be useful, especially when there are large assets involved or you want to make special inheritance provisions.
You can achieve certain goals with a trust that aren?t possible using a will alone. For example, you might want to name a trustee to manage your assets for a beneficiary who may not have financial experience. However, since each type of trust serves a different purpose, you?ll want to be sure you know what you want the trust to accomplish.
Once an asset has been placed in a trust, it passes to the beneficiary or beneficiaries named in the trust rather than being transferred by your will. The same applies to the assets in your employer retirement plans, your individual retirement accounts (IRAs), annuities, or other insurance contracts.
All these assets, though, are included in the value of your estate when it is calculated, which usually occurs six months after your death. That value determines whether or not your estate owes taxes.
ESTATE TAXES
Every person is entitled to a federal tax credit, which can reduce or eliminate estate tax on assets left to heirs. In 2009, this credit lets you leave an estate worth $3.5 million tax-free. The top rate at which amounts in excess of that limit are taxed is 45%. Some states also impose estate and inheritance taxes, though the provisions and tax rates vary.
By the end of 2010, you can expect major changes in the way estates are taxed at all levels of government. But don?t use that as an excuse to delay. A well- designed estate plan will be flexible enough to accomplish your goals during a period of transition. And if you need to make changes when the new legislation is final, all of the documents you use in an estate plan, with the exception of an irrevocable trust, can be modified as needed.
In the interim, if estate taxes are a concern for you, you can make unlimited tax-free gifts of $13,000 per recipient in 2009. If you?re married and your husband or wife agrees, you can double that amount, even if only one of you has earned the money that you are giving away. And, in most cases, you can also make tax-exempt charitable gifts equal to half your adjusted gross income.
Giving after death can reduce taxes, too. If you bequeath part of your estate to a qualified charity, your estate will be able to deduct the value of those contributions from its taxable value. Bequests to your spouse are also fully deductible, provided he or she is a US citizen.
LEAVING A LEGACY
Through careful planning, you can simplify your estate, provide for the people and organizations that are important to you, and maintain the value of what you?ve worked hard to accumulate. In fact, estate planning is a natural extension of the financial planning you?re doing already, based on the plans and goals you?ve made for your life.
The best time to start your estate planning isn?t ten or twenty years from now ? it?s now. And as your life and your plans change, you should see to it that your estate plan changes as well.
Copyright ?2011 Lightbulb Press. All rights reserved.
Source: http://lightbulbfinancial.com/estate-planning/
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