Estate Planning Basics for Everyone

Now, only the very wealthy have to worry about Estate Planning. Many Americans are starting to think that way. Congress will not let the estate tax expire in 2010. Instead, it is likely to enact a permanent law with an exemption equal to or exceeding 2009’s $3.5 million level.

To many people that means their estates will be too small to worry about estate taxes or estate planning. That belief is likely to cost their heirs a lot of money and create other problems for both estate owners and heirs.

Estate planning is about much more than tax reduction. Estate planning ensures that your wealth is transferred to whom you want in the way you want, with minimal cost and delay. Estate planning focuses more on how much to give, when to give, and in what form to give. Most of us now can focus on estate planning issues other than taxes. Reducing or avoiding costs, including probate and its delays, become more important. Other issues to focus on include controls that can be put on gifts and inheritances so heirs won’t waste them; how to benefit more than one generation; ways to protect assets from creditors and in-laws; and simplifying the estate.

As you can see, a good estate plan includes a range of issues other than taxes.
The essential part of every estate plan of course is the will. Without a will, the state decides who inherits your assets, and the results are likely to be different from what you wanted. Many states give the surviving spouse only one third or two thirds of the estate. The rest goes to the children.

In the will you also name the executor and the guardian of any minor children, and can express any preferences for the funeral and burial. You also designate any trusts that should receive assets. The trustee and the terms of the trust can be included in the will or in a separate trust document.

Your estate plan also will decide to what extent you want to avoid probate and how to do it. In some states probate is streamlined, making it fairly fast and inexpensive. In other states probate still is a long, costly, inefficient process. There are several ways to avoid probate, each with advantages and disadvantages. Probate can be avoided by living trusts, joint title to property, life insurance, annuities, IRAs, and some other assets. An estate plan decides which of these to use and ensures they are implemented properly. The estate plan also has a will to cover assets that do not avoid probate.

Anticipating the potential disability of the estate owner is essential to a good plan. There should be powers of attorney for financial and medical decisions. Someone should be designated and empowered to pay bills, manage investments, and make other key financial decisions. There also should be one or more people authorized to make medical decisions. We have discussed these powers of attorney in detail in past visits, and those articles are available in the web site Archive. The key is the documents must be prepared and executed in advance.

Beneficiary designations also are vital but often overlooked. IRAs, 401(k)s, annuities, life insurance, and a few other assets pass to whoever is designated as beneficiary in the asset’s documents. Your will or living trust has no role in determining who inherits them. Too often, people do not update their beneficiary designations. You should always have a copy of your current beneficiary designations and review them every 18 months or so.

Your estate plan also should have some extra-legal documents. One document I call the beneficiary book or the executor book. This is a three-ring notebook that includes essential documents such as tax returns, personal financial statements, financial account statements, and an inventory of assets. It also should include any instructions about where to find other important items and how to handle any unique assets.

Many people also like to include a letter or other document that includes some life lessons, family history, or other thoughts they would like loved ones to remember.

People have used tax law uncertainty to procrastinate about their estate plans. It is time to recognize that a lack of a tax problem does not mean an estate plan is not needed. Also, a will, living trust, or life insurance policy does not amount to an estate plan. Much more is needed.

Don’t forget about state taxes. Many states are keeping their estate or inheritance taxes, and these will be a major expense for heirs if there is no planning.

Lack of a solid estate plan has destroyed the wealth of many families?even when taxes weren’t a factor. The devastation is more traumatic on those who weren’t significantly wealthy to start. Be sure you have an estate plan that covers all the bases, even if you do not expect to have a tax problem.