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Estate planning

Estate planning is the process of reviewing the assets that will be inherited on your death and then working out how to transfer them efficiently, minimizing probate costs, and federal and state taxes. It can include plans to fund taxes to keep a family business together, and provision of income for spouse and heirs in coming years.

Expanded Definition

The basic document of estate planning is the will, which details your wishes for the disposition of your property. Some also advise a living will to convey your desires on the degree of medical care to be given in the case of incapacitation by coma, etc. A durable power of attorney is part of the usual package of documents to allow others to carry out business for you if you become disabled. Everyone should have this basic collection of documents.

A key number to keep an eye on is the Federal Estate Tax Exclusion. Under current law, the value varies every year, and members of Congress suggest changes in this law almost every quarter. The number in 2008 is $2MM; in '09, $3.5MM; in '10, no tax; and in '11, $1MM. Above the exclusion, the estate tax rate is quite high, typically 45%. Hence, those whose estate comes close to exceeding this value will need to consider alternatives, such as trusts. The most common kind of trust is the AB bypass trust, which for a married couple doubles the exclusion, currently to $4MM.

It should be noted that the total estate is calculated very much as expected, but IRA, Roth IRAs, 401(k)s and annuities are included in the calculation. The value of life insurance benefits is also included (unless the policy is in a properly designed trust, such as an Irrevocable Life Insurance Trust).

Those with assets less than $3.5MM need to be concerned about inheritance taxes in their state and probate costs. Probate costs can be as high as 5% of an estate in some states. The usual solution is a living trust, which is a revocable trust that becomes irrevocable on the death of the person. By avoiding probate, you avoid the attorney fees associated with probate and you keep your will and probate records from becoming public documents in your courthouse.

Inheritance taxes vary widely. Details of taxes in your state usually come from an estate attorney or from courses offered for adults in local schools.

Those with assets over about $3.5MM will want to investigate trusts further. Your local library or bookstore usually has a collection of many volumes on this subject. They vary in detail and complexity. The library books may be older editions, but it is probably worth a trip to the library to look them over and find the one that covers subjects of interest to you in language you can understand. Then consider purchasing a more recent edition.

If your estate is complex an attorney specializing in estate law is a key player, but you may also need a financial planner or CPA to work out the plan that works best for you. However, most would be well advised to wait until after the election and details of new laws become available before making major undertakings beyond the basics.

Trusts have the difficulty that they need to be updated from time to time to keep them consistent with new laws. That means a steady stream of legal bills maintaining the documents. Near the margins, those costs weigh against a trust.

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