Estate Planning – The Basics

Estate planning is something we must all take seriously.  Whether you have significant assets or more moderate assets, estate planning is how you ensure that your heirs receive what you want them to receive when your estate is administered.  Proper estate planning considers your current and future needs and your plans for your family upon your death.

Successful estate planning transfers your assets to your beneficiaries quickly and usually with minimal tax consequences. That is right, the right estate planning means less of your assets go to taxes and more go to the people and institutions you choose.

The process of estate planning includes inventorying your assets and making a will and/or establishing a trust, often with an emphasis on minimizing taxes. The goal of this guide is to help you begin the estate planning process.  While the guide will not answer all of your questions as every financial situation is unique, it should help you understand the key components and strategies of any estate plan, as well as understand some of the consequences of various decisions you may make during this process.  You should consult an attorney, or perhaps a CPA or tax advisor for additional guidance.

Do I Need to Worry? You may think estate planning is only for the wealthy. If your assets are worth $2,000,000 or more, estate planning may benefit your heirs. That is because generally taxable estates worth in excess of the amounts in the chart below may be subject to federal estate taxes, with a estate tax rate of 45% of the taxable estate.

Adding up the value of your assets can be an eye-opening experience. By the time you account for your home, investments, retirement savings and life insurance policies you own, you may find your estate in the taxable category. Even if your estate is not likely to be subject to federal estate taxes, estate planning may be necessary to be sure your intentions for disposition of your assets are carried out.

Year Exclusion Amount Highest Estate Tax Rate
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%

It is also important to note that estate taxes are scheduled to be repealed in 2010. However, if Congress does not affirmatively extend the repeal, in 2011, the estate tax law will revert to the provisions in effect in 2001 including a $1,000,000 exclusion amount and a 55% highest estate tax rate.

How Estates Are Taxed. Federal gift and estate tax law permits each taxpayer to transfer a certain amount of assets free from tax during his or her lifetime or at death. In addition, certain gifts valued at $12,000 or less can be made that are not counted against this amount. The amount of money that can be shielded from federal estate or gift taxes is determined by the federal applicable credit. The credit is used during your lifetime when you make certain taxable gifts, and the balance, if any, can be used by your estate after your death.

Keep in mind that while you can plan to minimize taxes, your estate may still have to pay some federal estate taxes. What is more, your estate may be subject to state estate or inheritance taxes, which are beyond the scope of this overview. An estate planning professional can provide more information regarding state taxes.

Estate planning is very complex and is subject to changing laws. This overview by no means covers all estate planning methods. Be sure to seek professional advice from a qualified attorney, and perhaps a CPA or estate planner. The money you spend now to plan your estate can mean more money for your beneficiaries in the long run.