Planning Your Estate

Avoid delays and tax losses through smart estate planning.

The purpose of estate planning is to distribute your assets according to your wishes after your death. Successful estate planning transfers your assets to your beneficiaries quickly and with minimal tax consequences. The process of estate planning includes inventorying your assets and making a will or establishing a trust, with an emphasis on minimizing taxes. This pamphlet provides only a general overview of estate planning. You should consult an attorney, CPA or tax advisor for additional guidance.

Do I Need to Worry

You may think estate planning is only for the wealthy. Actually, if you have assets worth more than $600,000, estate planning may benefit your heirs. That's because generally taxable estates worth in excess of $600,000 may be subject to federal taxes, which can be as high as 55% of the taxable estate.

Year - Unified Credit - Offset Tax On

1997 - $192,800 - $600,000

1998 - $202,050 - $625,000

1999 - $211,300 - $650,000

2000 - $220,550 - $675,000

2001 - $220,550 - $675,000

2002 - $229,800 - $700,000

2003 - $229,800 - $700,000

2004 - $287,300 - $850,000

2005 - $326,300 - $950,000

2006 - $345,800 - $1,000,000

Adding up your own assets can be an eye-opening experience. By the time you account for your home, investments, retirement savings and life insurance policies, you may find yourself in the over-$600,000 category.

Even in estates of less than $600,000, estate planning may be necessary to be sure your intentions for disposition of your assets are carried out.

Taking Stock

The first step in estate planning is to inventory everything you have and assign a value to each asset. Here's a list to get you started. You may need to delete some categories or add others.

• Residence

• Other real estate

• Savings (bank accounts, CDs, money markets)

• Investments (stocks, bonds, mutual funds)

• 401(k), IRA, pension and other retirement accounts

• Life insurance policies and annuities

• Ownership interest in a business

• Motor vehicles (cars, boats, planes)

• Jewelry

• Collectibles

• Other personal property

Once you know the value of your estate, you're ready to do some planning. Keep in mind that estate planning is not a one-time job. There are a number of changes that may call for a review of your plan. Take a fresh look at your estate plan if:

• The value of your assets changes significantly.

• You divorce or remarry.

• You have a child.

• You move to a different state.

• The executor of your will or the administrator of your trust dies or becomes incapacitated, or your relationship with that person changes significantly.

• One of your heirs dies or has a permanent change in health.

• The laws affecting your estate change.

How Estates Are Taxed

Federal gift and estate tax laws permits each taxpayer to transfer a certain amount of assets free from tax during his or her lifetime or at death. (In addtion, as discussed in the next section, certain gifts valued at $10,000 or less can be made that are not counted against this amount.)

The amount of money that can be shielded from federal estate or gift taxes is determined by the federal unified tax credit. The credit can be used during your lifetime when you make certain gifts, and the balance, if any, can be used by your estate after your death.

Keep in mind that while you can plan to minimize taxes, your estate may still have to pay some federal estate taxes. What's more, your estate may be subject to state estate or inheritance taxes, which are beyond the scope of this brochure. An estate planning professional can provide more information regarding state taxes.

Minimizing Estate Taxation

There are a number of estate planning methods that can be used to minimize federal taxes on your estate.

Giving assets during your lifetime. Federal tax law generally allows each individual to give up to $10,000 per year to anyone without paying gift taxes, subject to certain restrictions. That means you can transfer some of your wealth to your beneficiaries during your lifetime to reduce your taxable estate. For example, you could give $10,000 a year to each of your children, and your spouse could do likewise (for a total of $20,000 per year). You may make $10,000 annual gifts to as many people as you wish. You may also give your children or any other beneficiary more than $10,000 a year without incurring a gift tax, but the excess amount will count against your unified credit. For example, if you gave your favorite niece $30,000 a year for the last three years, you would reduce your unified credit by $60,000 (a $20,000 excess gift each year). Upon your death, your estate would have a unified credit of $540,000 remaining to shield your assets.

The marital deduction shields taxable property by shifting it to the surviving spouse. Federal tax law generally permits you to transfer assets to your spouse without incurring gift or estate taxes, regardless of the amount. This benefit is not, however, without its drawbacks. Marital deductions may increase the total combined federal estate tax liability of the spouses upon the death of the surviving spouse. When the surviving spouse dies, the beneficiaries must pay taxes on the combined estates. To avoid this problem, many couples choose to establish a bypass trust.

Bypass trusts or credit shelter trusts give a couple the advantages of the marital deduction while utilizing the unified credit to its fullest. Let's say, for example, that a married couple has a federal taxable estate worth $1.2 million (or $600,000 each). Using the marital deduction, the first spouse to die can leave the other the full amount without incurring taxes. However, when the second spouse dies and passes the full $1.2 million taxable estate on to their children, taxes will be levied on the excess over the $600,000 unified credit.

With a bypass or credit shelter trust, the first spouse to die leaves $600,000 in trust for the surviving spouse. Generally, the trust provides income to the surviving spouse for life, then upon the death of the surviving spouse the assets are distributed to the beneficiaries. This permits the spouse who dies first to utilize his or her $600,000 credit. If the trust document is drawn properly, the assets in the trust are not included in the surviving spouse's estate. Thus, the surviving spouse can transfer the remaining $600,000 of his or her estate tax free. Because both partners have made use of their unified credit, the couple is able to pass on a total of $1.2 million tax free to their beneficiaries. A bypass or credit shelter trust cannot eliminate taxation of an estate worth more than $1.2 million.

Charitable deductions are not taxed as long as the gift is made to an organization that operates for religious, charitable or educational purposes. Check to see if the organization you want to leave money to is an eligible charity in the eyes of the Internal Revenue Service.

Life insurance trusts can be designed to keep the proceeds of a life insurance policy out of your estate and give your estate the liquidity it needs. Generally, you can fund a life insurance trust either by transferring an existing life insurance policy or by having the trust purchase a new policy. Such trusts must be irrevocable-meaning that you cannot dissolve the trust if you change your mind later. With proper planning, proceeds from a life insurance trust may pass to your beneficiaries without income or estate taxes. This gives them the cash needed to pay for estate taxes or other expenses, such as debts or funeral costs.

Estate planning is very complex and is subject to changing laws. This brochure by no means covers all estate planning methods. Be sure to seek professional advice from a qualified attorney, CPA or estate planner. The money you spend now to plan your estate may mean more money for your beneficiaries in the long run.