Estate Planning

Proper estate planning may be the difference between providing your heirs with a comfortable inheritance or a major financial headache.

When you think of an estate, you probably think of a mansion on a large piece of property. Estate planning sounds like it might have something to do with how to buy the mansion, but it actually defines what you want to happen to your assets after your death. While no one wants to think about dying, it's important to have a plan in place to ensure your wishes are followed.

Goals of Estate Planning

The fundamental goals of estate planning are as follows:

1. Maintain control of the distribution of your assets after you die, instead of the court doing it for you.

2. Maintain control of your assets if you become incapacitated, instead of a family member doing it for you.

3. Minimize the tax liability on your estate, so your heirs inherit as much as possible.

4. Avoid probate — the lengthy and sometimes costly court process of validating your will — to save your heirs time and money, and to keep your personal finances out of public record.

If you have children, your primary goal is to provide for them both financially and emotionally by assigning appropriate monetary disbursements and guardianship. Each of the four items listed above includes ways to care for your children.

Examples of how to meet these goals are given below. It's recommended that you discuss your personal circumstances with an attorney or financial professional to ensure that your estate plan is accurate and complete.

The Basics

Before examining the goals of estate planning, it's important to note that an attorney should review your estate plan. If you're willing to do some of the work on your own, it may not be necessary to see an attorney right away. Estate planning software can save you time and money, and help you get the information you need before seeing an attorney. You may even be able to create legal documents with the software, but make sure your attorney reviews them.

What's in Your Estate?

Make a record of the valuables you own. Your estate will consist of the assets and liabilities that will remain after your death, such as:

• Businesses and business assets

• Real estate

• Savings and checking accounts

• Certificates of Deposit, mutual funds, stocks, and bonds

• Retirement plans, such as 401(k)s and Individual Retirement Accounts (IRAs)

• Life insurance death benefits paid to your heirs

• Personal property, such as furniture and jewelry

• Fine art and collectibles

• Debts and other liabilities

Be sure to make a complete list, including the value of each. If you don't know the value, consider having the item appraised. If the value isn't known at the time of your death, the Internal Revenue Service (IRS) will assess the value.

Goal 1 – Maintain Control of Your Assets After You Die

Prepare a Will

The primary aspect of estate planning is preparing a will. A will is a legal document that specifies certain things you want to happen after your death, such as:

• How your assets are to be distributed — who gets what

• The personal guardian of your children — who raises them

• The financial guardian of your children — who oversees how the personal guardian uses your money

• The executor of your estate — who oversees your wishes are being carried out

If you die without a will (intestate), the court makes these decisions for you. You probably don't want that to happen, and this is a main reason estate planning is so important.

A Special Note About Your Children

Dying intestate can be particularly difficult for your children. If there is no will, the court will choose guardians based on state law, not on what you've told your best friend, so it's important to write down your wishes in a will. For more information about intestate succession, read the article If You Don't Have a Will, the State Will Make One for You.

To be confident that your children are cared for the way you want, include the following information in your will:

• Provide written documentation about how you want your children raised. This might include your wishes regarding their education, religion, and lifestyle. This will serve as a guide for your children's personal guardian.

• Determine a schedule when money should be dispersed to your children. Since 18-year-olds might not wisely handle a large disbursement of funds, you could consider delaying the availability of their inheritance until they are a little older — for example, giving a third at age 25, age 30, and age 35.

• You may want to include in the schedule a stipulation that funds can be disbursed for certain purposes such as education, home buying, business start-up, or emergencies.

Goal 2 – Maintain Control of Your Assets if You Become Incapacitated

You may want to consider including the following documents in your will in case you become incapacitated:

• A durable power of attorney. Through a power of attorney you can appoint someone to make financial or legal decisions for you if you are no longer able to do so yourself. It's generally a good idea to make the scope of powers broad in nature because you may not be able to account for every possibility if you list specific things.

• A living will — also called an advance directive. A living will indicates your wishes about your medical care during a terminal illness or other health crisis, such as being unconscious. It typically includes the type of care you want and don't want, such as extreme resuscitation methods.

You can designate someone other than the person with durable power of attorney to ensure that your living will is carried out by making a separate health care power of attorney or health care proxy. For more information about living wills, visit the U.S. Living Will Registry website.

Goal 3 – Minimize the Tax Liability on Your Estate

A major consideration of estate planning is the estate tax your heirs may have to pay after receiving your inheritance. Until 2008, you can leave your heirs up to $2 million free of estate tax. In 2009 the limit rises to $3.5 million, and the death tax is scheduled to be repealed in 2010, meaning that you can bequeath all of your estate tax-free.

Although two or three million dollars might at first appear to be an amount far above the value of your estate, the combination of real estate values and your accumulated retirement savings could easily exceed a couple of million dollars. Because the potential tax liability is so high, a goal of your estate plan (at least for the next few years) is to minimize the portion of your estate that is taxable, and thus allow your heirs to inherit as much as possible. It's best if you consult a tax professional about this.

One way to minimize estate tax is to create a trust fund for the amount of your estate that is greater than the current limit. For example, if you place the additional funds in a charitable remainder trust, you will receive an income until you die, after which the remainder of the trust's assets go to your chosen charity. The charitable gift lowers the value of your estate and the taxes on it.

For more information about estate taxes, read IRS Publication 950 – Introduction to Estate and Gift Taxes and the IRS articleEstate Tax Questions.

Goal 4 – Avoid Probate

There are three main ways to avoid probate — the court process of validating your will.

• Designate beneficiaries on various assets, such as life insurance policies, savings accounts, and IRAs.

• Carefully title your jointly owned property. Two people, whether married or not, can own property together as joint tenants with right of survivorship. With this type of title, if your co-owner dies, the property passes to you without going through probate.

• Create a trust for the amount of your estate that is eligible for estate tax. You might consider putting the additional funds into a revocable living trust. This type of trust, which can be changed or cancelled by you at any time, allows you to maintain control of your assets while you're healthy. If you become incapacitated or die, a trustee manages the funds for you. Because the funds are in a trust, they pass to your heirs without going through probate. For more information, see the Connecticut Probate Courts booklet Understanding Trusts: A Look at Living Trusts and Other Trusts.

Review Your Estate Plan

It's not enough to just write an estate plan, you should also review it every couple of years. Make sure it's up to date with current laws, and that executors and guardians are correctly chosen. You should also review it after life events, such as:

• Marriage or remarriage

• Divorce

• Birth or adoption of each child

• Moving to another state

• Inheriting a large sum of money

Who Needs to Plan?

If you're over the age of 21, you should consider estate planning. Your needs will be different based on such things as the amount of your assets, your marital status, and whether you have children. Regardless of your circumstances, you need to have a specific plan in place.

For information on estate planning that's more specific to your situation, talk with an attorney or financial professional.

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Related Retirement and Estate Planning Articles:

• Starting a Retirement Plan in your 30's or 40's – Beginning to save for your retirement in your 30's or 40's still allows time to ensure a comfortable future. Supplementing your retirement plan with additional funds will certainly speed things up. Review your options and decide how you can reach your goals to retire on time and in financial comfort.

• The Pro's and Con's of Establishing an IRA – Whether you contribute to a 401K or have a pension, considering an IRA can provide additional support for your retirment. Use this outline to determine whether an IRA would be a worthwhile investment for your financial future.

• Social Security Income is Vital to your Retirement Plan – There has been much controversy over Social Security, and whether it will exist once certain workers retire. Regardless of what may happen, it is important for you to know if you are eligible for Social Security, how much you are entitled to receive, and what additional benefits may be available to you. Quickly educate yourself with this resource on Social Security.