Introduction
Imagine the emotional pain of losing someone close to you, such as a parent or a sister or a brother. Then image discovering that this person failed to do any estate planning, leaving the family with the heavy responsibility of sorting out his or her property and debts, and of making arrangements for the future care of his or her minor children. As unpleasant as it is to think about, the fact is, no one gets out of this world alive. Further, at death there are certain problems, which, if not planned for, can create a burden on those who are left behind. An experienced estate planning attorney can help you frame the estate-planning issues you need to address and can create a comprehensive estate plan covering both your financial and personal goals. This should be a part of your larger overall financial planning.
Your Estate
Your estate includes all the property that you own at the time of your death. Estates that exceed certain amounts may be subject to both state and federal death taxes. A federal estate tax is imposed on the right to transfer assets. At death, a person's estate will be valued to include all property he owns and often the property he has the right to control or access. Retirement benefits, personal residences and life insurance are all potential assets that could contribute to an estate tax problem. Federal estate taxes can be as high as 55% of the net taxable estate. By proper planning during your lifetime, you may be able to reduce or eliminate some or all of this type of tax.
If you are unable to reduce or entirely eliminate estate taxes through lifetime planning, estate liquidity should be a consideration when one asset compromises a considerable portion of your estate. For example, a piece of property or a business may disrupt the ability of your estate's executor to pay estate taxes, which generally are due nine months after the date of death. Your estate plan should address any estate liquidity concerns to reduce the potential for a "fire sale" of your business or other property to pay taxes, which can result in a depletion of the amount passing to your heirs.
Care Of Children
If you were to die tomorrow, who would be best suited to raise your children? Think of potential candidates, including siblings, parents, aunts, uncles and friends. Consider the candidates' ages, health, financial position and the stability of their current situation. Parents can nominate a guardian for their minor children in a will. Without a will setting forth who you would like to care for your children, you risk that a court will appoint someone who would not be your first choice to raise your kids or even a battle among your surviving relatives over the custody of your children.
You should also consider establishing a trust for your children, so that assets will not be distributed to them at too young an age upon your death. The trustee can care for the assets until some specified point in the future, at which time your children will be mature enough to handle the assets themselves. Moreover, establishing a trust allows you to give the trustee direction over how the money is to be used for your children's care.
Wills and Trusts
If you died tomorrow, who would you like to receive your home, personal property and your business? Would you like the state to determine who gets your possessions upon your death? This happens to people who do not memorialize their intentions in a will or trust document. Of course, most people would want to choose who will receive their property. You probably have items of sentimental value that you would like someone in particular to receive, such as jewelry or heirlooms and, without a will or trust, your instructions may not be followed.
Why would anyone pay additional taxes if they were not due? A will or trust can also incorporate provisions to help save taxes. Further, proper trust planning may reduce or even eliminate your estate taxes. Transfers during your lifetime and at death are subject to a unified estate and gift tax. Certain transfers are excluded from the transfer tax. For example, lifetime gifts can be excluded from gift taxation up to $10,000 per year per donee (indexed for inflation). You may also pass an unlimited amount to your spouse without tax consequence if he or she is a United States citizen. The unified credit allows you to pass property up to the equivalent of $675,000 (gradually indexed up to $1,000,000 in 2006 and thereafter). The unified credit is an effective way to shelter the transfer of property during life or at death from some or all gift or estate taxes.
Conclusion
Take affirmative action today toward relieving family members of the burden of sorting through your estate tomorrow. Procrastination may cost you the opportunity to save taxes and the opportunity to determine who will receive your property upon your death. Whether your estate requires complex planning with trusts or a simple will, it is advisable to have an experienced lawyer prepare your estate plan. You will gain the peace of mind that comes from knowing that your minor children will be cared for and that your property will be disposed of according to your wishes.