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Planning Your Estate
Consider an Estate-Planning “Checklist”
By Johnny Lowe
Financial Advisor, Merrill Lynch
If you’ve got some years to go until retirement, you may think it’s too early to think about estate planning. But no one can foretell the future — so it pays to be prepared.
Of course, estate planning consists of many different elements — so, to get yourself organized, you might want to draw up a checklist. Here’s what one might look like:
Identify your goals
Set out your broad goals. You might want to phrase them as a sort of “wish list”:
I want my assets distributed equitably to my family members.
If I become incapacitated, I want someone I can trust to handle my financial affairs.
I want to have my estate avoid going through probate.
I want to leave money to those charitable institutions I’ve always supported.
Draw up appropriate documents
You’ll find that estate planning can encompass many legal documents. Here are a few of the most common ones:
Will — Your will can identify those people to whom you want to leave your assets. You can also use your will to name a person (an “Executor” or “Administrator”) to handle your final affairs for you. While a will is important, it may not be enough to meet all your needs.
Living trust — A living trust goes beyond a will in a number of key areas. When you establish a living trust, your assets can pass directly to your beneficiaries, avoiding the time-consuming and expensive probate process. Also, a living trust can give you greater control over when your children or grandchildren will receive their inheritances. And, unlike a will, a living trust can prevent the court from controlling your assets if you become incapacitated.
Charitable remainder trust — If you want to include a charitable organization in your estate plans, you may want to consider a charitable remainder trust.
You can structure this trust so that you can receive an income stream for life; upon your death, the trust will pay out the remaining funds to the charity or charities you’ve chosen.
Durable power of attorney — When you set up a durable power of attorney,
you name someone to act for you if you become mentally or physically unable to make financial and legal decisions on your behalf.
Health care directive — By drawing up a health care directive, you authorize, in advance, the kinds of health care you would or would not want if, for whatever reason, you cannot communicate for yourself.
Estimate estate tax liability
Virtually all your financial assets — savings, investments, real estate, insurance policies, retirement plans, etc. — are generally part of your taxable estate. However, in 2004 and 2005, you can pass along up to $1.5 million of your estate, free of federal estate taxes, to your heirs. This estate tax exclusion rises gradually over the next several years, and, in 2010, the federal estate tax is scheduled to be eliminated, only to be reinstated in 2011.
Nonetheless, the permanent removal of the estate tax is still very much subject to political debate. Consequently, you may want to prepare for the possibility of dealing with estate taxes.
Consider steps to reduce estate taxes
Here are a few widely used techniques for lowering estate taxes:
Gifting — You can give up to $11,000 per year, to as many people as you choose, free of gift taxes. And these gifts reduce the size of your taxable estate.
Establish “credit shelter trust” — When you set up a credit shelter trust (also known as a “bypass” trust), your assets will bypass your surviving spouse’s taxable state — so you’ll be able to protect up to $3,000,000 in assets ($1.5 million each in estate tax exclusions) from estate taxes.
Create “irrevocable life insurance trust” — Your life insurance death benefits can amount to a large part of your taxable estate. But by putting your policies into an irrevocable trust, you can avoid estate taxes on the proceeds.
Get professional help
As you can see, estate planning is not a “do-it-yourself” activity. To draw up a comprehensive estate plan, you’ll need to work with an experienced estate planning attorney and a financial professional.
Get started soon. Drawing up an estate plan can be a challenging task — but it’s well worth the effort.
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