Estate Planning Isn't Just for the Wealthy

Your estate could get hit with a big tax bill posthumous, if you don't plan today.
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You're taxed when you earn money, taxed when you spend money, and taxed on gains when you invest the money you have left over! And if you're not careful, you'll be taxed again -- when you die!

You may think estate planning is only for the wealthy. Think again. Under current law, the first $2 million of assets in an estate is exempt in 2007-2008. By 2009, that minimum jumps to $3.5 million. The estate tax is

scheduled

to be abolished completely in 2010. But don't bet your estate on that happening, as Congress struggles to find money.

It's quite likely that law will "sunset" in 2011 -- and the estate tax will go back to the pre-2001 level of $1 million. When you add up the value of your home, your retirement account, and even your life insurance benefits if you own your own policy, you could easily be paying huge taxes to both state and federal governments, if you die without an appropriate plan.

Estate planning is not

all

about money. A lot of planning involves making sure that whatever assets you do have are given to the people you want to have them. Titling assets in joint tenancy, or naming beneficiaries for your retirement plans, will not solve all those potential problems.

What You Need

Here are a few basic documents you should have in place -- even if you don't have a lot of assets.

  • Revocable Living Trust: In most cases, this document is better than a simple will. It places your assets in a trust you create and manage while you are alive and competent. But when you die, or become incapacitated, the person you name as "successor trustee" can take over your affairs without petitioning the court, and is empowered to distribute your assets according to your directions after your death, without the time-consuming and expensive process of probate. While you are alive, you can buy and sell assets in the trust, reporting the gains or losses on your personal tax return. Important: Be sure to retitle assets such as your house, investment accounts and other property in the name of your trust.
  • Pour-over Will: This document simply says that any assets you own that are not titled in the name of your trust (perhaps your car, or your daily checking account) are moved into your trust at your death.
  • Irrevocable Life Insurance Trust: Unlike the Living Trust, this trust is used to hold title to your life insurance policies, allowing the proceeds to go to your beneficiaries, without becoming part of your taxable estate. Important: Have the trust purchase a new policy on your life, assuming you are still insurable. And remember there is a two-year contestability provision on that new policy. If you transfer an older policy, and die within two years, it could be brought back into your estate.
  • Health Care Power of Attorney: Name someone you trust to make medical decisions when you are incapacitated.
  • Living Will: The "pull the plug" document expresses your wishes about being kept alive in a vegetative state.

There are other kinds of trusts that can be used to protect marital assets, and to distribute your wealth to future generations. But you need expert advice to work through this process.

Don't Do It Yourself!

Estate planning is

not

a do-it-yourself proposition. Because state laws vary, and because you won't be around to fix things when mistakes are finally discovered, you need expertise that can't be found in online forms and sample documents. But you can learn enough to save some money on professional legal fees.

Here are a few ways to find a qualified estate planning attorney:

  • The Web site of the National Directory of Estate Planning, Probate, and Elder Law attorneys. You can search by city and state.
  • While estate planning is definitely not only for older people, this elder law Web site provides excellent information, and a searchable directory of qualified attorneys.
  • The Web site of the National Academy of Elder Law Attorneys has an excellent searchable database of estate planning attorneys.
  • The Web site of estate planning author David T. Phillips ( Estate Planning Made Easy) offers a free booklet -- "The 10 Most Common Estate Planning Mistakes." Phillips also provides a complete estate planning analysis -- not the plan, just the personal analysis and suggested strategies -- for $200, as well as a referral to his national network of estate planning specialists. The booklet and analysis will help you organize your thoughts, and understand what your own attorney is suggesting.

No one knows when fate will step in. Your only defense is to be prepared. Phillips says it best: "Procrastination is dangerous to your wealth!" And that's The Savage Truth.

   Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

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