Purpose of Estate Planning

Purpose of Estate Planning

The purpose of estate planning is to distribute your assets according to your wishes.
Successful estate planning transfers your assets to your beneficiaries over time, rather than all at one time due to the fact of your death, while minimizing tax consequences. The more time you have to work with the more taxes can be saved by planning so it is important to start your estate plan as soon as you can. Any time is a good time to get started. No time is a good time to wait.

The process of estate planning includes inventorying your assets, making a will, and establishing a trust, with an emphasis on achieving your personal goals at a minimum cost in taxes.

If the amount with respect to which the tentative tax to computed is	The tentative tax is:
Not over $10,000	18 percent of such amount
Over $10,000 but not over $20,000	$1,800 plus 20 percent of the excess of such amount over $10,000
Over $20,000 but not over $40,000	$3,800 plus 22 percent of the excess of such amount over $20,000
Over $40,000 but not over $60,000	$8,200 plus 24 percent of the excess of such amount over $40,000
Over $60,000 but not over $80,000	$13,000 plus 26 percent of the excess of such amount over $60,000
Over $80,000 but not over $100,000	$18,200 plus 28 percent of the excess of such amount over $80,000
Over $100,000 but not over $150,000	$23,800 plus 30 percent of the excess of such amount over $100,000
Over $150,000 but not over $250,000	$38,800 plus 32 percent of the excess of such amount over $150,000
Over $250,000 but not over $500,000	$70,800 plus 34 percent of the excess of such amount over $250,000
Over $500,000 but not over $750,000	$155,800 plus 37 percent of the excess of such amount over $500,000
Over $750,000 but not over $1,000,000	$248,300 plus 39 percent of the excess of such amount over $750,000
Over $1,000,000 but not over $1,250,000	$345,800 plus 41 percent of the excess of such amount over $1,000,000
Over $1,250,000 but not over $1,500,000	$448,800 plus 43 percent of the excess of such amount over $1,250,000
Over $1,500,000 but not over $2,000,000	$555,800 plus 45 percent of the excess of such amount over $1,500,000
Over $2,000,000 but not over $2,500,000	$780,800 plus 49 percent of the excess of such amount over $2,000,000
Over $2,500,000 but not over $3,000,000	$1,025,800 plus 53 percent of the excess of such amount over $2,500,000
Over $3,000,000	$1,290,800 plus 55 percent of the excess over $3,000,000

Do I Need to Worry
You may think estate planning is only for the wealthy. Actually, if you have assets worth more than $675,000, growing to $1,000,000 in 2006 (see table) estate planning can benefit your heirs. That's because generally taxable estates worth in excess of $675,000 may be subject to federal taxes, which can be as high as 55% of the taxable estate.

In the case of gifts made during:	The applicable exclusion amount is:
1998	$625,000
1999	$650,000
2000 and 2001	$675,000
2002 and 2003	$700,000
2004	$850,000
2005	$950,000
2006 or thereafter	$1,000,000

Adding up your own assets can be an eye-opening experience. By the time you account for your home, investments, retirement savings and life insurance policies, you may find yourself in the over-$675,000 category.

Even in estates of less than $675,000, estate planning may be necessary to be sure your intentions for disposition of your assets are carried out. This is especially true in cases where minor children are involved. Proper planning is the only way to ensure your plans for their care will be carried out in the case of the death of both parents.

Taking Stock
The first step in estate planning is to inventory everything you have and assign a value to each asset. Here's a list to get you started. You may need to delete some categories or add others.

Residence
Other real estate
Savings (bank accounts, CDs, money markets)
Investments (stocks, bonds, mutual funds)
401(k), IRA, pension and other retirement accounts
Life insurance policies and annuities
Ownership interest in a business
Motor vehicles (cars, boats, planes)
Jewelry
Collectibles
Other personal property

Once you know the value of your estate, you're ready to do some planning. Keep in mind that estate planning is not a one-time job. There are a number of changes that may call for a review of your plan. Take a fresh look at your estate plan if:

The value of your assets changes significantly.
You divorce or remarry.
You have a child.
You move to a different state.
The executor of your will or the administrator of your trust dies or becomes incapacitated, or your relationship with that person changes significantly.
One of your heirs dies or has a permanent change in health.
The laws affecting your estate change.

Setting Goals
In a lifetime of accumulation you have had to set goals for acquiring your wealth. It is at least as important to set goals for its distribution. If you don't have a plan you really have no control over the product of your lifetime. Isn't it better, for example, to give $10,000 per year to trusts to fund your grandchildren's education than to pile up money you don't need and which will be taxed at up to 55% when you die?

How Estates Are Taxed
Federal gift and estate tax laws permits each taxpayer to transfer a certain amount of assets free from tax during his or her lifetime or at death. (In addition, as discussed in the next section, certain gifts valued at $10,000 or less can be made that are not counted against this amount.)

The amount of money that can be shielded from federal estate or gift taxes is determined by the federal unified tax credit. The credit can be used during your lifetime when you make certain gifts, and the balance, if any, can be used by your estate after your death.
Keep in mind that while you can plan to minimize taxes, your estate may still have to pay some federal estate taxes. What's more, your estate may be subject to state estate or inheritance taxes.

Minimizing Estate Taxation
There are a number of estate planning methods that can be used to minimize federal taxes on your estate.

Giving assets during your lifetime. Federal tax law generally allows each individual to give up to $10,000 per year to anyone without paying gift taxes, subject to certain restrictions. That means you can transfer some of your wealth to your beneficiaries during your lifetime to reduce your taxable estate. For example, you could give $10,000 a year to each of your children, and your spouse could do likewise (for a total of $20,000 per year). You may make $10,000 annual gifts to as many people as you wish. You may also give your children or any other beneficiary more than $10,000 a year without incurring a gift tax, but the excess amount will count against your unified credit. For example, if you gave your favorite niece $30,000 a year for the last three years, you would reduce your unified credit by $60,000 (a $20,000 excess gift each year). Upon your death, your estate would have a unified credit of $540,000 remaining to shield your assets.

The marital deduction shields taxable property by shifting it to the surviving spouse. Federal tax law generally permits you to transfer assets to your spouse without incurring gift or estate taxes, regardless of the amount. This benefit is not, however, without its drawbacks. Marital deductions may increase the total combined federal estate tax liability of the spouses upon the death of the surviving spouse. When the surviving spouse dies, the beneficiaries must pay taxes on the combined estates. To avoid this problem, many couples choose to establish a bypass trust.

Bypass trusts or credit shelter trusts give a couple the advantages of the marital deduction while utilizing the unified credit to its fullest. Let's say, for example, that a married couple has a federal taxable estate worth twice the unified credit ($675,000 times two or $1,350,000 in 2000). Using the marital deduction, the first spouse to die can leave the other the full amount without incurring taxes. However, when the second spouse dies and passes the full $1.35 million taxable estate on to their children, taxes will be levied on the excess over the $675,000 unified credit of the second spouse. In effect this wastes the unified credit of the first spouse to die equal to $220,500 in 2000 growing to $345,800 in 2006 (see table above). This is a lot to waste for failure to plan properly.

With a bypass or credit shelter trust, the first spouse to die leaves $675,000 in trust for the surviving spouse. Generally, the trust provides income to the surviving spouse for life, and then upon the death of the surviving spouse the assets are distributed to the beneficiaries. This permits the spouse who dies first to utilize his or her $675,000 credit. If the trust document is drawn properly, the assets in the trust are not included in the surviving spouse's estate. Thus, the surviving spouse can transfer the remaining $675,000 of his or her estate tax free. Because both partners have made use of their unified credit, the couple is able to pass on a total of $1.35 million tax free to their beneficiaries. A bypass or credit shelter trust cannot eliminate taxation of an estate worth more than twice the unified credit.

Charitable deductions are not taxed as long as the gift is made to an organization that operates for religious, charitable or educational purposes. Check to see if the organization you want to leave money to is an eligible charity in the eyes of the Internal Revenue Service.

Life insurance trusts can be designed to keep the proceeds of a life insurance policy out of your estate and give your estate the liquidity it needs. Generally, you can fund a life insurance trust either by transferring an existing life insurance policy or by having the trust purchase a new policy. Such trusts must be irrevocable-meaning that you cannot dissolve the trust if you change your mind later. With proper planning, proceeds from a life insurance trust may pass to your beneficiaries without income or estate taxes. This gives them the cash needed to pay for estate taxes or other expenses, such as debts or funeral costs.

Estate planning is very complex and is subject to changing laws. Be sure to seek professional advice from a qualified attorney. The money you spend now to plan your estate may mean more money for your beneficiaries in the long run.

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