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The Great Estate

Most people think of estate planning as something that only the rich need to do. As for you, you’ve managed to do alright. You’ve been able to buy a house, send the kids off to college, and put aside a small nest egg. Along the way, you’ve been able to accumulate a few modest possessions—some investments, jewelry, and a piece of property from your folks. You’re comfortable but certainly not rich.

Yet estate planning is just as important for you and your loved ones as it is for the Trumps and Rockefellers of this world. Many would be surprised over how much wealth they’ve accumulated and the ramifications it could have for their heirs if they don’t plan wisely. Here are some basic considerations when looking at estate planning.

The basics
Estate planning allows you, not the court, to make important decisions about caring for your loved ones and the disposition of your property when you are no longer able to do so. With a proper estate plan, you can address these major issues:

  • Name the executor or personal representative of your estate
  • Name a guardian and make decisions about the future financial security of your children
  • Manage and distribute your assets
  • Minimize probate fees and estate taxes

Federal Estate Taxes
The 2001 Tax Act made significant changes in the taxation of estates. In essence, the size of nontaxable estates was increased on a rolling basis through 2009. In addition, the estate tax rates were reduced through 2009. In 2010, the entire estate tax will be eliminated, but only for one year. In 2011, the rules prior to the 2001 Tax Act will be reinstated. Many observers believe, however, that these rules will be reviewed and possibly changed by Congress before they are reinstated.

How does an estate get taxed?
Under current laws, the federal government levies a tax on your estate up to 45%. The tax is charged against the value of the estate after allowable deductions are taken. Those deductions include burial expenses, existing debts, charitable contributions, and accrued taxes. In addition, any assets left to a surviving spouse are also not included in the taxable estate. After the estate tax is calculated, there is a credit allowed against the tax. As a result, “smaller” estates generally pay no tax. Moreover, the amount of the credit is increasing. Below is a chart indicating the size of taxable estates that will be subject to tax after the credit.

Year Estate Size Where Taxation Starts Top estate tax rate
2009 $3,500,000 45%
2010 No estate taxation  
2011 $1,000,000 55%

Note that the tax is levied on the fair market value of your assets and not the cost basis. That is significant for many individuals because the value of their stock portfolios or small business interests has grown significantly over the past few years.

For the young
No parent wants to think about leaving young children behind. But if both parents pass away and no guardian is named, the court will decide on who will care for your children. That is probably a choice you would prefer to make yourself. An estate plan will allow you to do that and be assured that your wishes will be carried out.

For the young at heart
As people age and accumulate wealth, the nature of their estate plans becomes more focused on how to manage and eventually distribute their assets—minimizing estate taxes, establishing trusts for surviving family members, and deciding who receives financial assets and other personal items.

Seek help from experts
Estate planning is not a task to be taken lightly. Rules are complex and may differ from state to state. Qualified professionals can ensure that your estate plan accomplishes your objectives.
Generally, an estate plan should be reviewed every three or four years, or as your situation or the estate tax rules change. Births of children, changes in marital status, significant increases in income or wealth, or a change in your domicile should also trigger a review of your estate plan.
The approaching new rules should also prompt everyone to review their estate plan. It is important that your will and other documents take the new laws fully into account.