You probably have given more time and attention to building your estate than to planning for its disposition when you are no longer around. This is understandable — most people do not like to consider their own death. However, the Internal Revenue Service (IRS) will look into your estate when you do pass away, and will likely be able to impose estate taxes. These taxes could cost your estate a lot of money if you have not established a proper estate plan.
Advance planning will allow your property to be distributed per your wishes and help you avoid some estate taxes. With the help of a qualified financial professional, you can create an estate plan that minimizes your tax risks, and that is consistent with your objectives.
You can start by using some basic estate planning strategies:
- Maintaining Financial Records. After your death, your heirs will need to understand your financial situation. You can help them by keeping organized records and letting them know where to find your will, insurance policies, bank statements, and other important documents.
- Updating Your Will. A will is a necessary legal estate planning document, since its purpose is to specify how your property is to be distributed and treated when you die. Without a will, the state or the courts will determine the distribution of your assets according to general inheritance laws.
- Creating the Necessary Legal Instruments. In addition to a will, you may want to establish legal instruments such as a durable power of attorney that designates someone to make financial decisions on your behalf in the event of incapacity or a living will that indicates your wishes for the use of life-sustaining measures. A complete estate plan must deal with issues that come up both within your lifetime and after your death.
- Taking Advantage of the Applicable Exclusion Amount. In 2002, each taxpayer has a $1,000,000 combined gift and estate tax applicable exclusion amount (the new Tax Relief Act will increase the exclusion to $3.5 million by 2009). Individuals with large estates who leave everything to their spouse forfeit the use of their exemption and run the risk of having some assets unnecessarily taxed a second time when the spouse dies. A trust may help minimize this problem for large estates.
- Using the Annual Gift Tax Exclusion. Under current IRS law, individuals can give away up to $11,000 per year to an unlimited number of recipients tax-free. A planned giving strategy that takes advantage of this exclusion is a way to remove assets that are appreciating in value from an estate and will help reduce the taxable assets in the estate.
- Making Proper Life Insurance Beneficiary Arrangements. Life insurance can be considered part of your estate when calculating estate taxes. Structuring life insurance policies to remove the benefits from the value of your estate is a way to reduce your tax exposure.
Objectives-Estate Planning