Estate planning is not just a matter of seeking to save dollars and minimize taxes. The process of planning your estate also raises some difficult emotional and personal issues.
Estate Planning forces you to contemplate your own mortality; you are trying to plan for a time when you won’t be around to make decisions. Others, particularly those you love, will be affected by the plans you make now and will be required to exercise their own judgment once you are gone. For many people, the most difficult step in the estate planning process is deciding who gets what and when.
To whom you leave your money and property is a personal decision. Most people naturally think of planning for their spouse, children, and relatives first. After the family is provided for, perhaps a favorite charity, such as an alma mater or research foundation, might be included as a beneficiary.
The best approach for you will depend upon your family, the size of your estate, and your personal wishes. Here are some guidelines to consider:
Talk to your children. When your children are mature enough to discuss financial matters, let them know, in general terms, the size of your anticipated estate and talk over your plans with them. If they are old enough, give them the opportunity to make their preferences known. Are they interested in running the family business? Do they have a preference about how their inheritances or trusts might be structured?
With inheritance comes responsibility. In most states, 18 or 21 years is the legal adult age. However, even a 21-year-old may not be mature enough to handle the responsibilities of a sudden windfall. Think about the age at which your children might be capable of meeting this challenge, and consider strategies that can help you plan for that time.
Anticipate Estate Taxes. As has often been said, two things in life are certain: death and taxes. Estate planning is the art of ensuring that one doesn’t cause the other. People often underestimate the size of their estates and end up with an unanticipated estate tax bill.
If you are a business owner or professional there is a good chance that the value of your estate already tops the exclusion amount, or will soon. Even if you don’t have substantial personal wealth, hidden assets such as pension or profit-sharing plan benefits, as well as life insurance, may cause your taxable estate to exceed the exclusion amount.
Add it all up. At death, the Federal estate tax applies to asset transfers to beneficiaries other than a spouse for estates valued in excess of the applicable exclusion amount ($5.25 million for 2013). One of the most important elements in estate planning is calculating the value of your estate. The following steps can help you estimate your estate’s worth.
Prepare a net worth financial statement listing all of your assets and any interests of ownership reduced by any and all liabilities. The total is your net worth. Be certain that you do not overlook hidden assets. Also, when subtracting your liabilities, include estimated funeral and burial expenses and the estimated costs of administering your estate (generally, 2% to 5% of the gross value of the estate). Now, subtract your charitable bequests and the marital deduction. Your entire estate, no matter its size, can pass to your spouse estate tax free. This deduction, however, does not eliminate the possibility that estate taxes may be due on assets transferred by your surviving spouse upon his or her death. For this reason, both you and your spouse must establish estate plans that will maximize asset transfers to your heirs and minimize estate taxation.
There may be some very helpful tax provisions in the Internal Revenue Code (IRC), so be sure to take the time to plan your estate carefully in seeking to minimize taxes. The better you plan now, the better you may provide for your family’s future.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.