Every adult should have an estate plan. This holds especially true for anyone who has children, owns property or is a business owner. Properly structuring your estate can help you achieve your financial goals during your lifetime and after your death.
Good estate planning allows you to control the transfer of your wealth to your loved ones and the charities that are important to you, while reducing or eliminating estate taxes. While you are living, a good estate plan can help you manage your assets and other legal issues using a durable power of attorney and can document your wishes about future healthcare decisions.
Good estate planning decisions consider the needs and concerns of several generations. Your dreams for your children and grandchildren can be fulfilled with even greater success if you and your adult children share your estate planning goals and strategies. Without adequate planning, your estate may not be distributed the way you want, and your biggest beneficiary could be your least favorite relative—Uncle Sam. Here are some basic documents to consider:
Last Will and Testament
A will allows you to direct how assets owned in your individual name are distributed at your death. If you do not have one, those assets could be distributed according to the laws of the state in which you live. Jointly owned assets that are controlled by a beneficiary designation (such as insurance, annuities, IRAs or retirement accounts) or that are owned in a Transfer or Payable on Death (TOD or POD) account pass directly to the named beneficiaries and are not controlled by your will. A will is also used to appoint a representative to manage your estate and a guardian for your minor children.
A revocable living trust allows the assets held in trust to pass directly to beneficiaries without being controlled by your will or going through a probate estate. Using a revocable trust reduces the time and cost associated with estate administration and keeps the details of your estate private. Because you maintain complete control over the revocable trust during your lifetime, the value of the assets held in the trust is included in your federal estate for estate tax purposes.
Credit Shelter/Bypass Trust
Federal law provides an applicable exclusion from the estate tax. The exclusion, $2 million in 2006, will increase to $3.5 million in 2009. You can transfer this amount at your death to someone other than a spouse without paying federal estate tax on the excluded amount. Quite often, this transfer is completed by a married couple using a bypass trust. A family trust or individual revocable trust document is drafted for each spouse. Family members are named as beneficiaries, and the surviving spouse can be given the income from the bypass trust. In addition, the principal of the trust can be made available to the surviving spouse if necessary. After the survivor dies, the principal passes to family beneficiaries free of federal estate tax. The maximum applicable exclusion can also be distributed from the surviving spouse’s estate to family beneficiaries free from federal estate tax. There is no federal estate tax due in 2010. Under current federal law, the exclusion will return to $1 million in 2011. If no change is made by Congress, your applicable exclusion will remain at $1 million after 2011.
Power of Attorney
A power of attorney appoints a person to be your attorney-in-fact to act as your agent to manage your financial and legal affairs in the event that you become incapacitated. The power of attorney can be made durable, which would allow your agent to act on your behalf even if you are mentally incapacitated. Because this is a broad power, you must be careful that you can trust the person you appoint as your agent.
Advanced healthcare directives state your wishes about your medical treatment. If you are unable to make these decisions, a healthcare power of attorney appoints an attorney-in-fact to give medical personnel directions on what procedures should be undertaken on your behalf. A living will spells out the circumstances in which you would want to discontinue extraordinary measures to keep you alive. These directives should be as complete and explicit as possible to ensure your wishes are carried out correctly.
It is important to review your estate plan every three to five years. After a major life change, such as a birth, death, marriage or divorce, review your plan to see what impact this change may have. Your financial advisor can work with you and your legal and tax advisors to keep your documents up to date and working for you and your family. iBi