What is estate planning?
Estate planning is a process to consider
alternatives for, to think through, and to set up
legally effective arrangements that would meet your
specific wishes if something happens to you or those
you c are about. Good estate planning is more than
just a simple Will. Estate planning also typically
minimizes potential taxes and fees, and sets up
contingency planning to make sure your wishes
regarding health care treatment are followed.
On the financial side, a good estate plan
coordinates what would happen with your home, your
investments, your business, your life insurance,
your employee benefits (such as a 401K plan), and
other property in the event you became disabled or
if you die.
On the personal side, a good estate plan includes directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you select would do that for you, and know when you would want them to authorize heroic measures and when you would prefer they pull the plug.
What are some typical estate planning documents?
Several of the following documents are typically used as part of the estate planning process:
- A Will, sometimes called a "Last Will and
Testament", to transfer property you hold in
your name to the person(s) and/or
organization(s) you want to have it. A Will also
typically names someone you select to be your
Personal Representative (or "Executor") to carry
out your instructions and names a Guardian if
you have minor children. A Will only becomes
effective upon your death, and after it is
admitted to probate.
- A "Durable Power of Attorney for Health
Care" or Health Care Proxy appoints a person you
designate to make decisions regarding your
health care treatment in the event that you are
unable to provide "informed consent".
- A "Living Will" or "Directive to Physicians"
is an advance directive which gives doctors and
hospitals your instructions regarding the nature
and extent of the care you want should you
suffer permanent incapacity, such as an
- A "Durable Power of Attorney for Property"
appoints a person you designate to act for you
and handle financial matters should you be
unable or perhaps unavailable to do so.
- A "Living Trust" can be used to hold legal
title to and provide a mechanism to manage your
property. You can select the person or persons
you want -- often even yourself -- as the
Trustee(s) to carry out the instructions you
want in the Trust and name one or more Successor
Trustees to take over if you cannot. Unlike a
Will, a Trust usually becomes effective
immediately, continues in force during your
lifetime even in the event of your incapacity,
and continues after your death. Most Trusts are
"revocable" which allows the person who creates
the Trust to make future changes, modifications
and even to terminate it. (If the Trust is
"irrevocable", changes, modifications and
termination are very difficult (and sometime
impossible), although such Trusts often carry
some tax benefits.) Trusts also help you avoid
or minimize the expenses, delays and publicity
- A "Family Limited Partnership" can be used to own and manage your property, in a similar manner to a Trust, but allowing additional tax planning techniques to be employed. Family Limited Partnerships are typically used for those who have large estates and thus have a need for specialized estate planning in order to minimize federal and state estate/death/inheritance taxes as well as provide elements of asset protection.
Who should have an estate plan?
You should have an estate plan if:
- you are the parent of minor children
- you have property that you care about
- you care about your health care treatment.
If you do not have minor children, do not care about your property, and have no concerns about your health care treatment, then you do not need an estate plan. But if you meet any of these categories above, you should have an estate plan.
What is a conservatorship?
If you suffer from an incurable disease or are
involved in a debilitating accident and are unable
to manage your own affairs, state law might require
someone to go to court to have a conservator
appointed by the court. The conservator is given the
authority to make financial decisions and handle
your financial affairs, under court supervision,
when you lack the capacity to manage them on your
The conservator has to make periodic reports to the court and petition the court for additional authority under certain circumstances. Typically, the conservator may be paid for services rendered on your behalf and there will be attorney fees as well. In addition, the court will often require your conservator to purchase a "surety bond" which is a type of insurance policy, to protect the conservatorship estate. The costs and expenses of a conservatorship are paid by your estate.
How can my estate plan lower the federal transfer tax liability?
Everyone gets a credit against Federal estate and
gift taxes of $220,550, in 2000 and 2001, which is
equivalent to transferring $675,000 tax free to your
heirs. (The estate tax exemption amount increases
slowly to $3.5 million in 2009; the estate tax is
totally eliminated in 2010 and reinstated in 2011 at
an exemption level of $1,000,000.) Those with an
estate of less than $1,060,000 (in 2001) should have
no fear of the generation skipping transfer tax (the
GST drops back to $1,000,000 in 2002 and thereafter
matches the gradual increases in estate tax
exemptions in effect for the calendar year. The GST
is repealed in 2010, but reinstated in 2011).
For those who are married, there is an unlimited
marital deduction. All estate taxes can be avoided
upon the death of the first spouse to die. But the
surviving spouse would have to remarry and give
his/her entire estate to the new spouse in order to
get another unlimited marital deduction. Most people
would rather their children or other relatives
benefit from the estate, rather than a new spouse
and his/her family.
An estate plan can take advantage of certain tax
avoidance techniques for those who have accumulated
some wealth; this gives more of your property to
your intended beneficiaries, instead of giving it to
the federal government. Some of these techniques
- a tax by-pass trust to hold property for
your children, while still providing for your
surviving spouse during his/her lifetime
- distribution of share in a Family Limited
Partnership to take advantage of minority and
lack of marketability valuation discounts
- a gift program to take advantage of the
current $11,000 per year per person gift tax
exclusion so as to prevent a greater tax in the
future in the form of an estate tax
- an irrevocable trust to handle and manage
property outside of your estate, so that the
property is not part of your estate at the time
Tax planning as part of estate planning can, depending on the size of one's estate, save hundreds of thousands to millions dollars - if it is done right.
Can I leave my pension to my spouse or to my child?
In general, if you are married, your spouse is
entitled to a portion of your pension if you die
first. There is some cost to that, however, that
usually serves to reduce the monthly retirement
payments you would have received if the benefits
were to be paid just during your lifetime. If you
and your spouse agree, you can waive this survivor
benefit protection, and/or sometimes name some other
person(s) (such as a child) as your beneficiary.
Consult with your plan administrator and review the
plan summary carefully to find out your rights and
responsibilities in this area.