You Can't Take it With You...

Earlier this year, the U.S. Congress tried to repeal the "death tax," or estate taxes assessed on inheritances. President Clinton vetoed the bill, but this legislative activity did focus attention on estate planning. Even though estate taxes only apply to large estates, everyone -- no matter how large or how small their estate -- should take some basic steps to protect the people they leave behind.

Wills

Your estate planning efforts should start with writing a will. In a will, you can specify exactly how you want your estate distributed. You can name a guardian for your children, and an executor who will have broad decision-making authority over your estate.

If you die without a will, the laws of your state will determine who gets your money – and the division may not be what you would have wanted. For example, if you are unmarried and have no children, your estate probably will be divided among your parents and your siblings, even if you would have wanted to leave something to friends or to a favorite charity.

You do not need a lawyer to write a valid will. You can do it yourself, perhaps using a software program. However, you may benefit from talking to experts, such as a lawyer and a tax advisor, especially if your estate is large or your plans for distribution are complex.

Trimming the tax bill

You want to make sure that your money gets into the hands of your heirs, and not into the tax coffers of Uncle Sam. There are limits to the amount you can pass on tax-free, though.

If your spouse is a U.S. citizen, you can leave an unlimited amount to him or her, since no estate taxes apply to a spouse beneficiary. A beneficiary other than your spouse won’t have to pay estate taxes unless your estate tops $675,000 (an amount that is increasing gradually to $1 million in 2006). But on estates over this amount, federal estate tax rates start at 37% and go as high as 55%. Your state also may levy a tax on your estate.

Trusts and other options

If you think your estate will be over $675,000, there are things you can do to minimize the tax burden. First, if you are married, coordinate your planning. There are ways you and your spouse can set up ownership of your property, for example, to limit the value of that property when it is passed on to your children or other heirs.

You can set up trusts to pass assets to your children, other relatives or charities. Depending on how the trust is set up, you may have the use of the assets while you live. Trusts also can let you control how and when your estate is distributed.

Since not all trusts reduce estate taxes, you may wish to speak with an estate planning professional.

You also can give anyone up to $10,000 per year, tax-free. In other words, if you have three children and two grandchildren, you can reduce the value of your estate by $50,000 per year.

Talk it over

You may not want to consider estate planning because you are uncomfortable talking about death. But failure to plan can be a financial disaster for your heirs.

Start by talking with your spouse and family. Talk to the people you choose to be your executor and guardian of your children, to make sure they are prepared to accept these responsibilities. Then, if necessary, talk to a lawyer or estate planning professional. And review your estate plan periodically, especially if you have major life changes.

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