Two key elements provide the basis of your estate planning: the nature of the
assets in your estate and the characteristics of your intended beneficiaries.
Some assets, such as a family business, require a major commitment from the
recipient; other assets, such as a portfolio of mutual funds, don't. Some
assets can be left by will or personal trust, while others, including
retirement accounts and insurance proceeds, are usually left to the
beneficiaries designated on the accounts or policies. (Making sure the right
beneficiaries are named is an essential part of estate planning.)
It’s also important to think about your beneficiaries. Are they people or
organizations? Are they minors or adults? Do you have children from a previous
marriage? Are your intended beneficiaries good at managing money or will they
need help? A number of factors will contribute to your decisions about who will
receive what assets and how they'll receive the assets. A charity might prefer
to receive your money, while your affluent son might prefer to get the family
beach house.
Let’s say you want to name your daughters as 2 of your beneficiaries. One is a
thrifty and successful investor, but the other has no interest in investing and
tends to overspend. You might leave the first daughter money free and clear. To
protect the second daughter, you might leave the money to a trust that would
provide professional financial management and control how the money can be
spent.
If you're married, your spouse needs to be involved in your estate planning from
the start. Some important strategies you’ll want to consider require
coordination between both spouses’ plans. You should also discuss your estate
planning with other family members if possible. Hard feelings can arise when
items that have sentimental value for one relative are unknowingly left to
another.
Start your estate planning by drawing up an inventory of all your property,
along with a realistic estimate of each asset’s value. Give careful
consideration to each of your potential beneficiaries and make note of any
characteristics that might affect how you'd want them to benefit from some
property or assets in your estate. Once you have completed your inventory,
familiarize yourself with the basics of estate planning so you can work
effectively with your estate planning professional.
Minimize Your Taxes
Because the federal estate, gift, and generation-skipping transfer taxes will be
imposed at rates as high as 50% in the coming years, you’ll want to plan based
on the size of your estate.
Most families don’t have enough assets to make the estate tax a concern. If your
estate (including your spouse’s property) will be under $1 million, you
probably don’t need to worry about estate tax planning—at least not yet.
If you have more than $1 million, you need to consider estate tax planning. The
more assets you have, the more aggressive and complex your plan may become.
Many strategies for reducing estate taxes are complicated and involve giving up
control of some assets during your lifetime or require the filing of additional
income tax returns each year. Some risks can be involved—an innovative estate
tax planning strategy could be challenged in court.
As you think about your estate plan and as you work with an estate planning
attorney, ask yourself these questions:
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How important is it for me to control all of my assets during my lifetime?
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How much complexity can I deal with, and how much work am I willing to do to
save on taxes?
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How much legal risk am I willing to take by using aggressive strategies in my
estate plan?
You and your adviser or attorney might very reasonably decide that your answers
to those questions will rule out certain estate tax planning strategies. For
some people, the amount of discomfort and hassle caused by these strategies
simply may not be worth the amount of tax they'd save.
Get to Know the Basic Tools
At its most basic level, estate planning starts with determining how the
ownership of your property will pass to your beneficiaries when you die. Some
of your property may be held in a personal trust, some may be owned by you,
some by your spouse, and some by both of you.
Many people rely on a last will and testament—written instructions—to dictate
how their property is to be distributed upon death. Despite its name, a “last
will” isn’t always the last word on how your property will be distributed.
Property held in a trust would be distributed according to the terms of the
trust—no matter what the will says. Similarly, the naming of beneficiaries on
retirement accounts or insurance contracts can override the terms of a will.
(Beneficiaries are commonly named on IRAs, retirement plans, insurance and
annuity contracts, and directed beneficiary accounts, which are also known as
“transfer on death” accounts.)
In addition, property can be distributed according to the terms of a partnership
or shareholders’ agreement. State law also may dictate how some property is
distributed to ensure that a spouse and minor children receive a minimum
percentage of the estate.
The links below take you to information about the basic tools of estate
planning.
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Personal trust basics
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Personal trusts and reducing estate taxes
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Last will and testament
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Substitutes for wills
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Other estate planning tools