Estate Planning: Protecting Your Family, Providing for Your Wishes

This discussion provides a broad general overview of the relatively complex issues in estate planning and is not intended to provide you with specific advice. Everyone's personal and financial situation is unique. It is important that you consult a professional financial adviser, such as a CPA financial planner, to advise you on the latest developments in this field or if you have specific questions or need advice on estate planning strategies.

Everything you own at the time of your death may be considered part of your estate, including your home, bank accounts, insurance policies, and any of your other assets. Have you ever stopped to think about what will become of all that when you're gone? Don't assume it will be distributed according to your wishes. The fact is that if you haven't done the necessary planning, you don't have much control over what will happen to your estate after your death. A carefully developed estate plan can help make the transition to a life without you easier for your family.

Estate planning involves the development of strategies for protecting your assets, distributing them according to your wishes, and otherwise providing for your family. A carefully developed estate plan can help you to accomplish many estate planning goals, such as the following:

· Provide for an orderly transfer of your property in accordance with your wishes.

· Minimizing the taxes on your estate and maximize the inheritance for your beneficiaries.

· Ensure the availability of cash to pay necessary taxes and administrative expenses.

The most critical component of an effective estate plan is a properly prepared will—one that transfers your assets in accordance with your wishes. Additionally, you must consider the probate process and the possible tax liabilities of your estate. This process can involve in-depth financial projections and estate tax calculations. Depending on your individual situation, estate planning may entail naming guardians for your children, creating trusts, special titling of assets, and other activities.

Writing a will protects your family and ensures that your wishes will be carried out. Anyone of legal age with any property should have a will. If you die without a will, or what is known as intestate, your estate will be distributed as determined by state law and administered by someone appointed by a court. In addition, the court will decide who will care for your minor children. Dying intestate also can increase the tax burden for your heirs and cause dissension within your family.

· Distribute your property as you wish, including personal property of sentimental value.

· Select the person you want to distribute your estate, eliminating the necessity of an expensive, court-appointed administrator.

Naming an executor. An executor should be named in your will to see that its provisions are carried out. Select someone you can trust and who has both the time and the financial know-how, since he or she must oversee the probate process and will have many responsibilities, including the following:

· Pay your debts and expenses, as well as those of your estate, including funeral expenses, tax liabilities, and administration expenses.

· Sell assets as necessary and invest others prudently to provide income during the time that the estate is being administered.

Naming guardians. A similar approach to child-raising is an important factor to consider when selecting guardians for your minor children. In addition, you may want to discuss possible guardians with your children and use their views in forming your decision. If you are seriously concerned with the financial discipline of prospective guardians, consider naming a separate trustee to manage the money and property left to the children. In most cases, however, it is wise to select guardians who will not only love and care for your children, but who are financially responsible as well.

Probate is the legal process of identifying and distributing your probate assets (any assets in your estate that are not transferred automatically or in trust) to the appropriate beneficiaries. If you have a will, the process includes proving that the will is valid and ensuring that assets are distributed according to its provisions.

Otherwise, the probate court will oversee the distribution of your assets according to your state's intestacy laws.

The probate process is a matter of public record and can be costly and time consuming. There are many estate planning strategies that enable you to avoid or bypass the probate process. These strategies typically involve providing for the transfer of your assets through joint ownership, trusts, or gifts while you are alive, instead of through a will. Although avoiding probate may be beneficial in terms of time, money and privacy, bypassing probate does not eliminate or reduce estate taxes.

How long does settlement take? An estate not subject to probate may be settled relatively quickly. In contrast, a probate estate takes time to settle because there are so many variables involved. For example, creditors must be allowed an opportunity to come forward and file any claims. A simple estate may take three months to a year to settle; a complicated estate two to three years or more. However, in special circumstances, preliminary distributions may be made from your estate during the settlement process. Note that a complicated estate subject to probate or not, can have a lengthy settlement process.

Life insurance is an essential estate planning tool because it provides immediate cash for survivors. Since proceeds are readily available, life insurance protects your family from being forced to liquidate some of your other assets to meet living expenses. Life insurance can also help your survivors pay debts, including estate taxes. Generally, insurance proceeds go directly to the beneficiary and do not have to go through the probate process.

Federal estate taxes and state death taxes are complex and can significantly decrease what your beneficiaries ultimately receive. It is advisable to consult with a professional financial adviser, such as a CPA financial planner, for information on estate, inheritance, and gift taxes on both the federal and state levels. The following are some basic estate tax planning considerations of importance.

Unlimited Marital Deduction. You may leave an unlimited amount of assets to your spouse (who is a

citizen) without any estate tax liability. However, when your surviving spouse dies, tax may be charged against his or her estate, which would include the assets received from your estate. This may result in a larger estate tax than would be the case if you both make good use of the unified credit, discussed below.

Unified Credit. Individuals are entitled to lifetime unified estate and gift tax credits that effectively exempt from the tax transfers up to specified amounts. The amount of estate transfers exempted—the applicable exclusion amount—is $1.5 million for the year 2004. However, the 2004 applicable exclusion amount for gifts is $1 million. Estates or gifts valued at less than the applicable exclusion amounts will pass tax-free to beneficiaries. Due to recent tax law changes and the complexity of estate and gift tax laws, you should consult your CPA financial planner or tax advisor to review your individual circumstances.

Transfer Tax Rates. An estate tax return must be filed if your taxable estate exceeds the applicable credit amount. Estates over this amount are taxed at rates up to 48% for 2004. Estate or gift transfers to grandchildren and certain other individuals may also be subject to the generation-skipping transfer tax (GST tax). You should consult your CPA financial planner or tax advisor for further information on the GST tax.

Gifts. Gifts are a classic way to reduce an estate and the related taxes. For 2004, you are allowed to make yearly tax-free annual exclusion gifts of up to $11,000 per recipient or up to $22,000 with your spouse's consent. Making gifts in excess of the exclusion amounts will have an impact on the lifetime unified credit and gift and estate taxes. Reminder: Only gifts of a present interest qualify for the annual exclusion. A gift of a present interest is generally one that the donee has immediate access to.

Developing a suitable estate plan requires setting concrete goals. Think about whom you want to provide for and how this should be accomplished. Of course, identifying your estate planning goals is only one component of the estate planning process. However, your goals become the framework for undertaking other activities, such as the following:

· Taking inventory of your assets and deciding on the appropriate form of ownership.

· Evaluating alternative strategies and identifying those that will help to meet your goals.

It's important to have a coordinated set of estate planning strategies in place as soon as you have acquired assets or become legally responsible for minor children. In addition, it is critical to review these plans from time to time. The effectiveness of strategies made last year or even today can be impaired by changes in your personal situation, your finances, and tax or inheritance laws. Once you've developed a plan designed to accomplish your goals, you should review the plan annually to ensure that it is still effective.

A CPA financial planner is well-versed in the latest developments and planning ideas and can help you analyze your situation, develop the strategies to help you achieve your estate planning goals, and work with your attorney and other financial professionals to formulate an estate plan that is right for you.