Do It Right: A Lot Is at Stake

A carefully thought-out estate plan can help you protect your lifestyle and standard of living when you or a family member gets sick or dies. Your plan could also be designed to save money on taxes and direct how your money gets divided after your death. You can't complete your estate planning alone — a general practice attorney who does estate planning will be able to help you in basic circumstances. You'll need to hire — and pay a higher fee to — an estate attorney who specializes in complex planning and trusts if your situation is more complicated. Start with the general practice attorney; she will refer you to a specialist if you need it.

Set Your Priorities

An estate attorney will tell you that you can't guarantee the management of your affairs from the grave, but by employing certain trusts, ownership designations, and power-of-attorney designations, you can come close to controlling your assets both during your lifetime and after your death. Take time now, before beginning your plan or meeting with an attorney, to make a list of your priorities. Here are a few points to consider:

  • How important to you is sole control of your assets?

  • At what point of declining health would you consider asking a family member or friend to help you manage your money?

  • Under what health or family circumstances would you decide to change your living situation?

  • Who are the people your plan would affect — as caregivers, dependents, or beneficiaries?

  • Whom do you want to include in the planning process?

  • Wills are easy to update if you change your mind and need to make a change to the beneficiary, executor, or any other part of the document. In many cases your lawyer will attach a codicil to the will with the changes you want instead of rewriting the whole document.

    Direct Asset Control Versus Saving Taxes

    In addition to regular income tax planning, your estate plan might need to consider whether or not to try to manage estate taxes. Estate taxes must be paid on assets above a certain value limit that are owned by the person who died and are not left to his or her American citizen spouse. If your spouse isn't an American citizen, or if your assets are being left to another individual such as a child or a friend, then the estate tax might apply to your estate. The estate tax laws are expected to be rewritten, so check with your advisor or the IRS website (www.irs.gov) for updates. Under current rules, a person dying in 2008 can leave an estate up to $2 million without having to pay tax. That limit is expected to increase to $3.5 million in 2009.

    Remember that gifts are permanent. Once you give money away, it becomes the asset of the receiver and could be considered as asset by his creditors, or a marital asset in his divorce. If you manage to get the asset back, it won't be considered a gift for estate tax purposes.

    If you're concerned about your beneficiaries losing part of their inheritance to the estate tax, you can take steps to reduce the tax by giving them assets while you're still living or giving up direct control of the asset by transferring it to a trust. Watch the tax rules if you decide to give assets away while you're still living. Just as with the estate tax, if you're giving assets to someone other than your spouse you need to watch the value of the gift. In 2008, you can give up to $12,000 to an individual without incurring a separate gift tax. The limit counts for all the gifts in a year, so be careful if you like to give birthday or holiday gifts — they apply to the limit as well. Since gifts and inheritances are transfers from one person to another, the gift and estate tax are linked. If you'd like to give more than the $12,000 annual limit to an individual, you can do it, and then file a gift tax return either paying the tax due on the gift or applying it toward the total amount your estate can leave.

    Trusts to manage estate taxes are complex and expensive. Be sure to interview at least three estate planning attorneys before choosing one. Also, make sure you completely understand the use and purpose of any trusts they create for you.

    Keep It in Trust

    “Trust” is the name given to legal entities that can be created to hold assets. They can be irrevocable — or unchangeable — or revocable. They can be created while you are alive, called living trusts, or they can come into being at your death. In the latter case, they are created by instructions in your will and are called testamentary trusts. Trusts are managed by trustees who follow the trust's instructions, and often their own good judgment, to manage the assets in the trust.

    Trusts can be simple or complicated. Your estate attorney will help you decide whether you need a trust as part of your estate plan, but the most frequent uses of trusts are to reduce estate taxes, to manage assets for an individual who can't manage the assets himself, or to smooth the financial bumps for a family as an individual's estate goes through probate. Some people place their assets in revocable trusts so that they can name additional individuals as joint trustees — including themselves, in most cases — so that those trustees can be called on to manage the assets if they become incapacitated.

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