Estate planning is more than simply having a will. It is a continuous planning process done to alleviate the financial impact of your death on those you leave behind. By spending just a few hours and dollars now, you can save your loved ones or beneficiaries from paying as much as a 35% estate tax. But a well-constructed estate plan may not only reduce the tax bill, but also help your loved ones understand, resolve and prepare for many of the issues that arise when settling an estate. We'll show you where to start.

Dying without a Will
Dying without a will is known as dying intestate. If this were to happen in the U.S., intestate succession laws would come into play, and your relatives would have to go through probate to claim ownership of assets, perhaps even fight over assets. The state would determine how your property passes to your heirs. If no heirs fit the state's formula, your assets may become property of the state. A will can help you avoid the pitfalls of dying intestate; however, even if you have a will, your assets will still be subjected to the timely and costly probate process (court involvement).

How a Will Can Help
A will primarily allows you to control the distribution of your assets and state your final wishes.

One very important advantage of a will is that it allows you to recommend a guardian to care for your children or other dependent beneficiaries in the event of your death. Because this is an overwhelming responsibility, you should select your guardian(s) carefully and also obtain their consent before listing them in your will. Although the final decision concerning guardianship is made by the court, the courts give a lot of weight to the parent's decision in the will.

Other important items on your will are clauses clarifying the will and its purpose. In the exordium clause, for instance, you state your name and residence, and officially declare the document a will. Be careful to note in this clause that the will supersedes all previous wills, making them null and void. In the will you should also name the executor/administrator of your estate and how you would like that person to distribute your assets, including how all your debts, taxes and funeral expenses are to be paid. To avoid family disputes, you may want to add a non-contestability clause, which states that if any beneficiary contests the will, his or her share becomes null and void. Of course, a non-contestability clause is not suitable for every family's circumstance.
How to Start on Your Estate Planning
Now that you understand the importance of having a will, here's a list of steps that gives an overview of the estate planning process:

  • Make a list of all your assets and liabilities.
  • Open a family discussion of who should be the guardian for your children.
  • Check and update your current beneficiaries (those designated for IRAs, life insurance, etc).
  • Review the current federal estate tax exemption limits (discussed below).
  • Determine the distribution of your assets upon your death (family, charity, etc).
  • Discuss your funeral arrangements with your spouse or family.
  • Seek the assistance of a certified estate-planning attorney.

(For more on designating IRA beneficiaries, see Who Is The Beneficiary Of Your Account?)

A simple will may cover all your estate planning needs if the value of your estate falls materially below the estate-tax exclusion amount. The federal estate tax is an excise tax levied on the transfer of a person's property that exceeds a certain amount at the time of that individual's death. If your estate is worth more than the tax exclusion amount, the tax can be hefty. As such, you really need to take a serious look at your personal situation, and, if your estate is more than the tax exclusion, look into more estate-reduction and planning techniques, which will help your beneficiaries avoid the estate tax (we discuss these techniques further below). Keep in mind that direct transfers to your spouse are not taxed - these assets are not taxed until s/he dies (this is called a marital deduction).

The chart below demonstrates the maximum estate tax that the federal government can levy and the amount of estate that is excluded from the tax.

Year Maximum Estate Tax Rate Estate Tax Exclusion
2005 47% $1,500,000
2006 46% $2,000,000
2007 45% $2,000,000
2008 45% $2,000,000
2009 45% $3,500,000
2010 35% (gift tax only) estate tax repealed
2011 55% (plus 5% surcharge) $1,000,000

Estate-Reduction and Planning Options

Let's take a look at some estate-planning tools and estate-reduction techniques:

  • Use trusts to maximize the exclusion and avoid probate. Trusts help you do so because they are designated to a beneficiary.
  • Take advantage of charitable donations to reduce your estate.
  • Use your estate to pay family educational and medical expenses as these are tax deductible.
  • Loan assets to family members to minimize your estate.
  • Buy life insurance to help pay estate taxes, but remember life insurance will provide payouts only under certain conditions (executor or beneficiary should be owner).
  • Utilize annual gifting to minimize taxes and maximize the value to your loved ones on your will.
  • Set up durable powers of attorney.
  • Establish your funeral and burial plans.
  • Seek professional help from your financial advisor, an estate-planning specialist or a lawyer specializing in estates.

Sometimes changes in your life - such as a sudden increase in wealth, a new marriage or remarriage, the birth of a child, a serious illness or a death in the family - can trigger the need for an estate plan evaluation. All of these factors could affect your current plan and require revisions or additions.

Estate planning is truly for the benefit and care of your loved ones, making the legal and financial issues easier to deal with if you pass away. Since planning for death is not always a No.1 priority, we tend to postpone setting up the legal documents. But at a minimum, every competent adult should have a will drafted. The problems associated with probate, creditors, con artists, lawsuits, lawyers and death taxes can all prolong the settlement of your estate. Don't wait to establish your plan until you've heard someone else's horror stories.

Related Articles
  1. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  2. Investing Basics

    Do You Need More Than One Financial Advisor?

    Using more than one financial advisor for money management has its pros and cons.
  3. Insurance

    What's The Difference Between Medicare And Medicaid?

    One program is for the poor; the other is for the elderly. Learn which is which.
  4. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  5. Savings

    How To Set Up A Trust Fund If You're Not Rich

    You don't need to be worth millions to create your own trust fund. Learn how your money can be handled in the event of your death.
  6. Financial Advisors

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
  7. Retirement

    Top Signs You Aren’t Ready to Retire Yet

    Think you are prepared to retire? These warning signs may indicate otherwise.
  8. Investing

    How the Rothschild Family Created Their Wealth

    An overview of how the Rothschild dynasty became one of the most powerful families in the world.
  9. Retirement

    5 Reasons Retirees Are Upsizing Instead of Downsizing Their Homes

    Many retirees opt to downsize to save money, but there are many who are doing the opposite and upsizing.
  10. Savings

    Fund College for a Grandchild: 529 vs. HEET

    For some grandparents, a HEET is a desirable option for funding their grandchildren's college education. Here's what you need to know about this trust.
  1. What is the difference between revocable and irrevocable intervivos trusts?

    Within estate planning, individuals have a myriad of options for maintaining control over assets beyond the grave. A tool ... Read Full Answer >>
  2. How do I attract high net worth individuals (HNWI) as clients at my financial advisor ...

    While the majority of financial advisers provide wealth management and comprehensive financial planning to a wide range of ... Read Full Answer >>
  3. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  4. How much money does Texas make from unclaimed property each year?

    In 2014, the office of the Texas Comptroller of Public Accounts reported $234 million in unclaimed property claimant liabilities, ... Read Full Answer >>
  5. How much money does Michigan make from unclaimed property each year?

    According to the 2013-2014 Annual Report of the State Treasurer, the state of Michigan earned only $82,875 in abandoned and ... Read Full Answer >>
  6. Who decides if a financial security should be escheated?

    There is no one entity who "decides" to escheat assets. Rather, financial institutions are required to report inactive accounts ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center