Your Estate Plan
1. No matter your net worth, it’s important to have a basic estate plan in place. Such a plan ensures that your family and financial goals are met after you die.
2. An estate plan has several elements. They include: a will; assignment of power of attorney; and a living will or health-care directive (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates.
3. Taking inventory of your assets is a good place to start. Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you’re ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself?
4. Everybody needs a will. A will tells the world exactly where you want your assets distributed when you die. It’s also the best place to name guardians for your children. Dying without a will — also known as dying “intestate” — can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
5. Trusts aren’t just for the wealthy. Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
6. Discussing your estate plans with your heirs may prevent disputes or confusion. Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you’re gone.
7. The federal estate tax exemption — the amount you may leave to heirs free of federal tax — changes regularly. The estate tax hit $3.5 million in 2009, but was phased out completely in 2010, but only for a year. In late 2010, Congress reunified the estate tax, gift tax and generation-skipping tax (GST), giving them all top rates of 35% with $5 million lifetime individual exemptions, indexed for inflation. For 2016, the estate and gift tax exemption is $5.45 million per individual with the inflation adjustment. In addition, the estate and gift tax exemptions are now portable between married couples. Upon the death of one spouse, the executor of the estate can elect to transfer any unused portion of the individual exemption to the surviving spouse. Married couples are currently able to shield $10.9 million from federal estate and gift taxes. The annual gift exclusion is $14,000 per person to any individual.
So considering all this, the big question is whether you should give away as much as you can to your children with the intent of reducing inheritance taxes down the road. Lifetime gifts reduce your taxable estate. Additionally, if you give your children appreciated securities, the long-term capital gains of those securities will be taxed at their capital gains rates rather than yours.
8. You may leave an unlimited amount of money to your spouse tax-free, but this isn’t always the best tactic. By leaving all your assets to your spouse, you don’t use your estate tax exemption and instead increase your surviving spouse’s taxable estate. That means your children are likely to pay more in estate taxes if the surviving spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until the surviving spouse’s death.
9. There are two easy ways to give gifts tax-free and reduce your estate. You may give up to $14,000 a year to an individual (or $28,000 if you’re married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
10. There are ways to give charitable gifts that keep on giving. If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.