Estate planning is a means of arranging the disposition of a person\’s wealth after he\’s gone. Appropriate, conscientious estate planning eliminates vagaries, minimizes probate and maximizes the value your heirs will gain from your assets by sidestepping unnecessary taxation and other expenses.

Estate planning becomes extremely important for those who amass a great deal of wealth in their lifetimes, but it is important for everyone, regardless of their net worth, to have some kind of estate plan ready for the inevitable. Without foresight, your financial goals for your family may fall apart after you die. It can be an uncomfortable topic when you look at it from the standpoint of your own demise, but your real incentive is to set in place the foundation of a legacy that enhances the lives of the new generations that will follow behind you. Without a plan, your family and your estate will be at the mercy of the courts and governmental regulations.

The first piece of your plan must be to draw up a will. Dying without a will subjects your entire state to probate and a judge will distribute your assets according to his determination not yours. Many assume that their spouse will obtain all assets upon their death. This is a faulty assumption as their may be other claims on the assets, your spouse may perish with you or may perish before you.

Another important aspect to consider when leaving everything to your spouse is that you will lose the federal estate tax exemption and increase the taxable amount of your estate when your spouse dies. This is the “death tax” that has become a political football of late, so it is difficult to tell how it will all settle out. In 2009, one could leave an estate valued at $3.5 million and not pay a tax on any of it. In 2010 there was no estate tax at all for that one year. The death tax was supposed to return in 2011 with an exemption of $1 million, which congress increased to a $5 million exclusion, indexed for inflation every January 1. Right now a surviving spouse is able to use the unused portion of the exclusion of the spouse who died first.

Right now the tax rate on assets is 35%, less than 55% of previous taxation eras but still a significant amount. More than a million dollars will go to the government of every $3 million of assets above the exclusion limit. If those assets include land, property or other tangibles, they will have to be sold in order to pay the tax. There are legal means available to give more cash and assets to your heirs without the heavy burden of taxation but they do require careful planning.

Some very efficient vehicles to earmark or donate cash and assets to family members while you are still alive are gifting and trusts. Life insurance, as long is it is of the permanent variety and not term, is another means to pass significant sums to heirs tax free. A retired person in good health can purchase a $100,000 policy for around $2,000 a year. Even if they survive until age 100 and pay the premiums, they will probably still pay less than the face value while saving their heirs $35,000 in estate taxes. It should be noted that premiums stop for permanent insurance when the insurance holder reaches age 100. Life insurance may also be used to cover all of the estate taxes with proper planning.

Other issues are involved in estate planning. One may need to set up guardians for minor children, appoint an executor, see to a power of attorney, create a living will or designate a healthcare proxy to determine what occurs with the estate and who makes the vital decisions if the estate owner becomes incompetent. These are all important considerations in a well-designed estate plan. The achievements of a lifetime are much too important to risk throwing away due to a lack of planning.

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Category: Finances
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