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What Estate Plan is Right for
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First, write a will. Nothing fancy--just a
document that leaves your property to whomever you choose and names a guardian for your
children. The guardian will take over if both you and the other parent are unavailable.
That's an unlikely situation, but one that's worth addressing just in case. If you fail to
name a guardian, a court will appoint someone -- possibly one of your parents.
The other big reason to write a will is that if you don't, some of your property may go
not to your spouse, but directly to your children. When given a choice, most people prefer
that the money go to their spouse (trustworthy ones, anyway), who will use it for the
kids. The problem with the children inheriting directly is that the surviving parent may
need to get court permission to handle the money--a waste of time and money in most
families.
Second, think about buying life insurance so the other parent will be able to replace your
earnings if that damn brick chooses you. Term life insurance is relatively cheap,
especially if you're young and don't smoke. You can shop for the best bargain by
consulting free services that compare the rates of lots of companies. There are many such
services available online; find them by searching for "term life insurance."
You're Middle-Aged and Know the Names of at Least Three Mutual Funds
If you've made it to a comfortable time in life--you've accumulated some material wealth
and enough wisdom to let you know that other things matter, too--you will probably want to
take some time to reflect on what you will eventually leave behind.
But given that you may well live another 30 or 40 years, there is no need to obsess about
it. Chances are your conclusions will be different in ten or 20 years, and your estate
plan will change accordingly.
To save your family the cost (and hassles) of probate court proceedings after your death,
think about creating a revocable living trust. It's hardly more trouble than writing a
will, and lets everything go directly to your heirs after your death, without taking a
circuitous and expensive detour through probate court.
While you're alive, the trust has no effect, and you can revoke it or change its terms at
any time. But after your death, the person you chose to be your "successor
trustee" takes control of trust property and transfers it according to the directions
you left in the trust document. It's quick and simple.
There are other, even easier ways to avoid probate: you can turn any bank account into a
"payable-on-death" account simply by signing a form (the bank will supply it)
and naming someone to inherit whatever funds are in the account at your death. You can do
the same thing, in about 40 states, with securities. (Ask your broker if your state has
adopted a law called the Uniform Transfer-on-Death Securities Registration Act.)
If you have enough property to worry about federal estate taxes, think about a
tax-avoidance trust as well. Currently, estates worth more than $650,000 are taxed; that
amount will increase to $1 million by 2007. Most estates are never subject to tax, but if
estate tax does take a bite, it can be a big one. Tax rates now start at 37% and rise to
55% for estates worth more than $3 million.
One way to reduce these taxes is to give away property before your death. After all, if
you don't own it, it can't be taxed. But gifts larger than $10,000 per year per recipient
are subject to gift tax, which applies at the same rates as does estate tax. Still, an
annual gift-giving plan can reduce the size of even a big estate, especially if you have a
good sized covey of kids and grandkids. Gifts to your spouse (as long as he or she is a
U.S. citizen), gifts directly to pay for tuition or medical bills, or gifts to a
tax-exempt organization are exempt from gift tax.
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