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2. Your Will
The
most critical component of an effective estate plan is a properly
prepared will ? one that transfers your assets in accordance with your
wishes. Additionally, you must consider the probate process and the
possible tax liabilities of your estate. This process can involve
in-depth financial projections and estate tax calculations. Depending on
your individual situation, estate planning may entail naming guardians
for your children, creating trusts, special titling of assets, and other
activities.
Writing a will protects your family and ensures that
your wishes will be carried out. Anyone of legal age with any property
should have a will. If you die without a will, or what is known as
intestate, your estate will be distributed as determined by state law
and administered by someone appointed by a court. In addition, the court
will decide who will care for your minor children. Dying intestate also
can increase the tax burden for your heirs and cause dissension within
your family. A will enables you to:
Distribute your property as you wish, including personal property of sentimental value.
Provide
for future management of investments or a family business. Designate
guardians for your minor children. Select the person you want to
distribute your estate, eliminating the necessity of an expensive,
court-appointed administrator. Minimize taxes and administration
expenses in the settlement of your estate. Provide for special desires,
such as charitable contributions.
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3. Naming An Executor.
An
executor should be named in your will to see that its provisions are
carried out. Select someone you can trust and who has both the time and
the financial know-how, since he or she must oversee the probate process
and will have many responsibilities, including the following:
- Prepare a complete inventory of all your assets.
- Collect any money owed to you.
- Pay
your debts and expenses, as well as those of your estate, including
funeral expenses, tax liabilities, and administration expenses.
- Notify life insurance companies of your death.
- Sell assets as necessary and invest others prudently to provide income during the time that the estate is being administered.
- Prepare and file all necessary tax returns for you and your estate.
- Distribute the estate to the people named in your will.
- Account for all receipts and disbursements of the estate.
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4. Naming Guardians.
A
similar approach to child-raising is an important factor to consider
when selecting guardians for your minor children. In addition, you may
want to discuss possible guardians with your children and use their
views in forming your decision. If you are seriously concerned with the
financial discipline of prospective guardians, consider naming a
separate trustee to manage the money and property left to the children.
In most cases, however, it is wise to select guardians who will not only
love and care for your children, but who are financially responsible as
well.
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5. What Is Probate?
Probate
is the legal process of identifying and distributing your probate
assets (any assets in your estate that are not transferred automatically
or in trust) to the appropriate beneficiaries. If you have a will, the
process includes proving that the will is valid and ensuring that assets
are distributed according to its provisions. Otherwise, the probate
court will oversee the distribution of your assets according to your
state's intestacy laws. The probate process is a matter of public record
and can be costly and time consuming. There are many estate planning
strategies that enable you to avoid or bypass the probate process. These
strategies typically involve providing for the transfer of your assets
through joint ownership, trusts, or gifts while you are alive, instead
of through a will. Although avoiding probate may be beneficial in terms
of time, money and privacy, bypassing probate does not eliminate or
reduce estate taxes.
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6. How Long Does Settlement Take?
An
estate not subject to probate may be settled relatively quickly. In
contrast, a probate estate takes time to settle because there are so
many variables involved. For example, creditors must be allowed an
opportunity to come forward and file any claims. A simple estate may
take three months to a year to settle; a complicated estate two to three
years or more. However, in special circumstances, preliminary
distributions may be made from your estate during the settlement
process. Note that a complicated estate subject to probate or not, can
have a lengthy settlement process.
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7. Life Insurance
Life
insurance is an essential estate planning tool because it provides
immediate cash for survivors. Since proceeds are readily available, life
insurance protects your family from being forced to liquidate some of
your other assets to meet living expenses. Life insurance can also help
your survivors pay debts, including estate taxes. Generally, insurance
proceeds go directly to the beneficiary and do not have to go through
the probate process.
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8. Tax Considerations
Federal
estate taxes and state death taxes are complex and can significantly
decrease what your beneficiaries ultimately receive. It is advisable to
consult with a professional financial adviser, such as a CPA/PFS, for
information on estate, inheritance, and gift taxes on both the federal
and state levels. The following are some basic estate tax planning
considerations of importance.
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9. Unlimited Marital Deduction
You
may leave an unlimited amount of assets to your spouse (who is a US
citizen) without any estate tax liability. However, when your surviving
spouse dies, tax may be charged against his or her estate, which would
include the assets received from your estate. This may result in a
larger estate tax than would be the case if you both make good use of
the unified credit, discussed below.
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10. Unified Credit
Individuals
are entitled to a lifetime unified estate and gift tax credit that
effectively exempts from the tax transfers up to a specified amount. The
amount exempted ? the applicable credit amount is $2,000,000. Estates
valued at less than the applicable credit amount pass tax-free to
beneficiaries.
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11. Transfer Tax Rates
An
estate tax return must be filed if your taxable estate exceeds the
applicable credit amount. Estates over this amount are taxed at rates up
to 46%.
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12. Gifts
Gifts
are a classic way to reduce an estate and the related taxes. You are
allowed to make yearly tax-exempt annual exclusion gifts of up to
$12,000 per recipient or up to $24,000 with your spouse's consent.
Making gifts in excess of the exclusion amounts will have an impact on
the lifetime unified credit and gift and estate taxes. Reminder: Only
gifts of a present interest qualify for the annual exclusion. A gift of a
present interest is one that the donee has immediate access to.
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13. Setting Goals And Getting Started
Developing
a suitable estate plan requires setting concrete goals. Think about who
you want to provide for and how this should be accomplished. Of course,
identifying your estate planning goals is only one component of the
estate planning process. However, your goals become the framework for
undertaking other activities, such as the following:
- Taking inventory of your assets and deciding on the appropriate form of ownership.
- Preparing your will and other legal documents.
- Reviewing insurance coverage.
- Estimating tax liabilities and the net estate available for distribution.
- Evaluating alternative strategies and identifying those that will help you to meet your goals.
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14. The Time To Start Planning Is Today
Friday, February 12, 2016
