Planning Your Estate
This article was produced by the MetLife Consumer Education Center and reviewed by the Division for Public Education of the American Bar Association and the Internal Revenue Service Editorial services provided by Meredith Custom Publishing.
A primary purpose of estate planning is to distribute your
assets according to your wishes after your death. Successful estate planning
transfers your assets to your beneficiaries quickly and with minimal tax
consequences. The process of estate planning includes inventorying your assets
and making a will or establishing a trust, with an emphasis on minimizing
taxes. This article provides only a general overview of estate planning. You
should consult an attorney, CPA or tax advisor for additional guidance.
Do I Need to Worry?
You may think
estate planning is only for the wealthy. Actually, if you have assets worth
$650,000 to $1,000,000 or more, estate planning may benefit your heirs. That's
because generally taxable estates worth in excess of $650,000* may be subject
to federal taxes, which can be as high as 55% of the taxable estate.
* The amount of assets shielded from federal estate
taxes by the unified credit will be gradually increased over 9 years beginning
in 1998.
| Year |
Unified Credit |
Offset Tax On |
| 1997 |
$192,800 |
$600,000 |
| 1998 |
$202,050 |
$625,000 |
| 1999 |
$211,300 |
$650,000 |
| 2000 |
$220,550 |
$675,000 |
| 2001 |
$220,550 |
$675,000 |
| 2002 |
$229,800 |
$700,000 |
| 2003 |
$229,800 |
$700,000 |
| 2004 |
$287,300 |
$850,000 |
| 2005 |
$326,300 |
$950,000 |
| 2006 |
$345,800 |
$1,000,000 |
Adding up your own assets can be an eye-opening experience. By the
time you account for your home, investments, retirement savings and life
insurance policies, 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.
Taking Stock
The first step in estate planning is to inventory everything you have
and assign a value to each asset. Here's a list to get you started. You may
need to delete some categories or add others.
- Residence
- Other real estate
- Savings (bank accounts, CDs, money markets)
- Investments (stocks, bonds, mutual funds)
- 401(k), IRA, pension and other retirement accounts
- Life insurance policies and annuities
- Ownership interest in a business
- Motor vehicles (cars, boats, planes)
- Jewelry
- Collectibles
- Other personal property
Once you know the value of your estate, you're ready to do some
planning. Keep in mind that estate planning is not a one-time job. There are a
number of changes that may call for a review of your plan. Take a fresh look at
your estate plan if:
- The value of your assets changes significantly.
- You marry, divorce or remarry.
- You have a child.
- You move to a different state.
- The executor of your will or the administrator of your trust dies
or becomes incapacitated, or your relationship with that person changes
significantly.
- One of your heirs dies or has a permanent change in health.
- The laws affecting your estate change.
How Estates Are Taxed
Federal gift and estate tax laws permits each taxpayer to transfer a
certain amount of assets free from tax during his or her lifetime or at death.
(In addtion, as discussed in the next section, certain gifts valued at $10,000
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 unified tax credit. The credit can be used during your lifetime
when you make certain 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's more, your estate may be
subject to state estate or inheritance taxes, which are beyond the scope of
this article. An estate planning professional can provide more information
regarding state taxes.
Minimizing Estate Taxation
There are a number of estate planning methods that can be used to
minimize federal taxes on your estate.
Giving assets during your lifetime. Federal tax law generally
allows each individual to give up to $10,000** per year to anyone without
paying gift taxes, subject to certain restrictions. That means you can transfer
some of your wealth to your children or others during your lifetime to reduce
your taxable estate. For example, you could give $10,000 a year to each of your
children, and your spouse could do likewise (for a total of $20,000 per year).
You may make $10,000 annual gifts to as many people as you wish. You may also
give your child or another person more than $10,000 a year without having to
pay federal gift taxes, but the excess amount will count against the amount
shielded from tax by your unified credit. For example, if you gave your
favorite niece $30,000 a year for the last three years, you would reduce your
unified credit by $60,000 (a $20,000 excess gift each year). Upon your death,
in 2006, only $940,000 of your assets would be sheilded from tax by the unified
credit.
** Beginning in 1999, the $10,000 gift annual tax
exclusion will be adjusted for inflation, as measured by the Consumer Price
Index (CPI) published by the Department of Labor. The increases will be in
multiples of $1,000.
The marital deduction shields property transferred to a spouse
from taxes.Federal tax law generally permits you to transfer assets to
your spouse without incurring gift or estate taxes, regardless of the amount.
That is not, however, without its drawbacks. Marital deductions may increase
the total combined federal estate tax liability of the spouses upon the death
of the surviving spouse. When the surviving spouse dies, the beneficiaries must
pay taxes on the combined estates. To avoid this problem, many couples choose
to establish a bypass trust.
Bypass trusts or credit shelter trusts give a couple the
advantages of the marital deduction while utilizing the unified credit to its
fullest. Let's say, for example, that a married couple has a federal
taxable estate worth $1.3 million (or $650,000 each). Using the marital
deduction, one spouse dies in 1999 the full $650,000 can be left to the other
spouse without incurring taxes. However, when the second spouse dies in 2002
and passes his or her $1.3 million estate on to their children, taxes will be
levied on the excess over the amount of assets shielded by the unified credit
($1,300,000-$700,000 = $600,000 subject to estate tax).
With a bypass or credit shelter trust, the first spouse to die can leave
the amount shielded by the unified credit to the trust. The trust can provide
income to the surviving spouse for life, then upon the death of the surviving
spouse the assets are distributed to beneficiaries, such as children. This
permits the spouse who dies first to utilize his or her unified credit. If the
trust document is drawn properly, the assets in the trust are not included in
the surviving spouse's estate. Thus, the surviving spouse's estate will be
smaller and can also utilize the unified credit. In the example above, the
surviving spouse's estate would not have to pay federal estate taxes. Because
both partners have made use of their unified credits, the couple is able to
pass on a substantial estate tax free to their beneficiaries.
Charitable deductions are not taxed as long as the gift is made to
an organization that operates for religious, charitable or educational
purposes. Check to see if the organization you want to leave money to
is an eligible charity in the eyes of the Internal Revenue Service.
Life insurance trusts can be designed to keep the proceeds of a
life insurance policy out of your estate and give your estate the liquidity it
needs. Generally, you can fund a life insurance trust either by
transferring an existing life insurance policy or by having the trust purchase
a new policy. Such trusts must be irrevocable-meaning that you cannot dissolve
the trust if you change your mind later. With proper planning, the proceeds
from a life insurance held by the trust may pass to trust beneficiaries without
income or estate taxes. This gives them cash which may be used to help pay
estate taxes or other expenses, such as debts or funeral costs.
Estate planning is very complex and is subject to changing laws. This
article by no means covers all estate planning methods. Be sure to seek
professional advice from a qualified attorney, CPA or estate planner. The money
you spend now to plan your estate may mean more money for your beneficiaries in
the long run.
This article, as well as any recommeded reading and
reference materials mentioned, is for general informational purposes only. It
is issued as a public service and is not a substitute for obtaining
professional advice from a qualified person, firm or corporation. Consult the
appropriate professional advisor for more complete and up-to-the-minute
information.
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Planning Your Estate: Inheritance Taxes, Gift Taxes, Estate Taxes
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