By George M. Hiller, JD, LLM, MBA, CFP®
Your estate consists of everything you own, including:
• Savings and investment accounts
• Equity in a home
• All personal property
• Retirement plan assets
• Life insurance proceeds
At death your property will go to either your heirs, charitable organizations as you direct, or to the government in the form of estate taxes. An estate plan is a set of strategies insuring that, at the time of your death, your estate passes to your chosen beneficiaries according to your intentions and without undue taxes, costs and expenses. Your estate plan also dictates the amount that will go to heirs, charity and the government. Without an estate plan, the odds are that what you own will be passed in ways you did not intend and with very high taxes and expenses that could have been easily avoided.
Wills
The centerpiece of the estate plan is the will, a legal document that allows you to:
• Specify who receives your property
• Appoint an executor to carry out the will
• Assign a trustee to manage any trusts created by the will
• Designate a guardian to take care of minor children
If you die without a will, you lose the right to make these choices and the state will determine the fate of your interests according to its laws of intestacy.
It is estimated that over 70% of the adult population in the United States are without valid wills. Every adult should have one, and those who don’t should consider creating one a priority. Because estate planning is best implemented with specialized strategies, ideally you will have an attorney prepare a will for you. If you decide not to consult an attorney there are will kits available at a very reasonable cost, (such as the one available through Crown Financial Ministries) that are generally much better than having no will at all. But, if at all possible, take advantage of the specialized knowledge and expertise an attorney can provide.
Complex Wills
If your estate is greater than $1,000,000 then you may very well need a more complex will that is designed to coordinate your unified credit and marital deduction with that of your spouse. The unified credit you and your spouse can each shelter up to $1,000,000 of your combined estate from estate taxes. With proper wills, you can shelter up to $2,000,000 of your combined estate from estate taxes. The amount of the unified credit is increasing over the next few years to a maximum of $3,500,000 for each spouse beginning in the year 2009.There is a one year repeal on estate taxes in the year 2010.
In addition to coordinating the marital deductions of both spouses, a complex will can also defer estate taxes until the death of the surviving spouse. One spouse is allowed to make qualifying gifts of qualifying gifts of property to the other spouse without being subject to estate and gift taxes. Given that the estate tax rate ranges from 37% to 50% of the fair market value of all property owned at death, this ability to defer estate taxes until the second death can be extremely valuable.
Power of Attorney Documents
Once you have proper wills in place, you should consider your needs for other documents that frequently are a part of a good estate plan, such as the Durable Power of Attorney for Health Care. This document allows you to name an agent (frequently your spouse or other family member) to make health care decisions for you if you are not able to make those decisions yourself. This document can also allow you to name the person you would want to serve as your guardian should the court decide that you need one.
A Durable Power of Attorney for Property allows you to name an agent (frequently a spouse or other family member) to make decisions regarding your property. The person you designate can make deposits or withdrawals from your bank and investment accounts, pay bills, and enter into contractual arrangements on your behalf.
Trusts
There are many different kinds of trusts that might be suitable for you depending upon your needs and objectives, including revocable and irrevocable trusts.
- Revocable trusts can be changed, amended or terminated over time. They are often used to provide for management of assets, to avoid probate, or to keep certain financial matters confidential. In general, revocable trusts are very flexible, but they do not save estate taxes.
- Irrevocable trusts can not be changed, amended, or terminated once established. They are much less flexible than revocable, but they can often be used to avoid estate taxes.
- Irrevocable life insurance trusts should be considered if you have a significant amount of life insurance, generally $500,000 or more. This trust removes life insurance proceeds from your taxable estate, allowing you to avoid estate taxes on up to 50% of you life insurance proceeds.
Charitable Giving
You may want to coordinate the creation of your estate plan with your giving to charitable organizations. Through wise planning you can donate funds that would otherwise have gone to pay estate or income taxes. Charitable trusts are useful if you have highly appreciated stock, real estate, or other property. Properly structured and implemented, this trust can allow you to avoid capital gains tax on the sale of appreciated property, receive significant income tax and estate tax benefits to yourself and other family members, and make significant charitable gifts.
There are two types of charitable trusts which can produce very favorable estate and income tax benefits.
- Charitable remainder trusts provide a lifetime income to you and your spouse with the remaining interest going to your designated charitable organizations at the death of the surviving spouse.
- Charitable lead trusts typically provide annual income to designated charitable organizations for a certain number of years; after which, the remaining interest goes to your children or other designated beneficiaries.
Retirement Assets
Assets held in qualified retirement plans such as most IRAs, 401(k) plans, profit sharing plans and other retirement plans are generally subject to both estate taxes and income taxes. The combined effect of assessing both estate taxes and income taxes on such retirement plan assets can result in overall taxes of up to 75%. For individuals who have retirement plan assets and charitable giving objectives as part of their estate plan, the gifting of retirement plan assets to charity can be very beneficial because such gifts avoid both estate taxes and income taxes.
Planning Strategies