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| Estate Planning: Will Power |
| Not all of the money you want to pass on to your heirs will get into their hands. Uncle Sam will want his fair share too. And that fair share seems to be growing. |
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| After almost a decade of increasing exemptions from the federal estate tax, the tax will return with a vengeance in 2011. The estate tax in 2011 currently stands at 55% with an exemption of $1 million for individuals (you won’t owe taxes if you estate is worth $1 million of less). In 2009, the exemption was $3.5 million. There was no estate tax in 2010. |
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| Although there isn't much you can do to control the tax situation, there are a few things you can do to reduce the tax burden on your estate: |
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| 1. Trust or Will? |
| If you want to pass your assets along after you're gone, you have two basic options: wills and trusts. A will is a good way to ensure your loved ones get what they deserve. Unfortunately, before your last wishes can be carried out, your will goes through court (called probate), and that can be time-consuming. Wills can't protect you from estate taxes, either. Trusts, alternatives to wills, help you avoid probate and sometimes taxes. See the chart below for details on both wills and trusts. |
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| 2. Review your employer retirement plan and IRA beneficiary designations. |
| You may not remember doing this, but when you filled out your employer retirement plan paperwork you were required to list the beneficiaries of your account in the event of your death. But did you realize that your beneficiary designations often will override any bequests you have made in your will? Most people don't and fail to update their designations after a major life-changing event–such as marriage, divorce or the birth of a child. That can be a major mistake. |
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| 3. Understand the tax consequences of your decisions. |
| You can leave your retirement account assets to anyone or anything (such as a charity or trust) you want. There are, however, different tax consequences associated with such decisions. For instance if the beneficiary of your employer retirement plan or IRA isn't your spouse, then they may have to take a mandatory distribution and pay taxes on that distribution. Neither your spouse nor a charity will face that same liability. |
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| Estate taxes are another issue. If you designate someone other than your spouse as your 401(k) or IRA beneficiary, then the money in those accounts will be included in the value of your estate. Your estate will then have to pay taxes on those assets. However, if you designate a charity as your beneficiary, your estate may be eligible for a tax deduction. A Certified Public Accountant (CPA) can help you assess the potential tax impacts for your situation. And an estate planning attorney can help to determine whether a trust can help protect you and your family. |
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| 4. Be aware how your investment choices may impact your estate. |
| To ensure a guaranteed stream of income in retirement, you can buy an annuity through an insurance company. You basically give that company a lump sum of money and, in return, you will receive a guaranteed amount of money each year until you die–whether that is 10 years from now or 40. The upside of an annuity is that it gives you some peace of mind that you will have a steady income through your entire retirement regardless of your future financial situation. The downside, though, is that the lump sum you used to buy the annuity is no longer part of your estate. Although some annuities may have special provisions that can provide your beneficiaries some benefits if you should die, those benefits may not be as great as what your beneficiaries might get with a different type of investment. |
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| Before making any decision on which route to take, we recommend you talk to a professional estate planning experts such as a lawyer or CPA. |
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