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Protect People You Love By Pamela Black, The Wall Street
Journal Don't be fooled by anyone who tells you that the estate
tax is dead or that only rich people pay it. For one thing, you may be richer than you think. People
often overlook big assets such as homes and life-insurance policies when
considering their net worth. As a result, they wrongly imagine that their
net worth falls below this year's $1 million-a-person estate-tax
threshold. Moreover, the steadily dwindling estate tax under the new
tax law will actually disappear completely for just one year, and then
spring back to life in 2011 unless Congress decides otherwise. Finally, a big part of what lawyers call estate planning
has nothing to do with taxes. Rather, you do it to secure your assets and
to protect your kids and other heirs. Here's what you need to know to protect the people you
love. What
We All Should Have First, you'll need a well-constructed will in which you
lay out instructions on which possessions go to whom, and what happens to
your kids. In it, you'll name an executor to carry out your wishes and a
guardian for your children. Minors who lose both parents become wards of
the state, at least temporarily, and decisions about their future may fall
to strangers. If
You're Incapacitated The will covers your death, but doesn't help if you
become incapacitated. For that, you need three documents. A durable power
of attorney directs who will handle your finances if you're unable to make
decisions. A health-care proxy assigns someone to make medical decisions
for you. And a living will lays out the measures you want taken to prolong
your life if you're critically ill. When
Complications Loom Probate is the legal process in which the state verifies
your will, seeks objections to it, and sees that the bills are paid and
assets handed out. If you have reason to believe your estate could get
jammed up in probate because of unhappy heirs who might contest your
wishes or because you have assets in different states, where you would
face separate probates, you should consider a living, or
"revocable," trust. It would cost anywhere from $1,000 to
$5,000. But it can help you avoid probate, which, depending on your
state's regulations, can drag on for years. Pulling
Strings Worried about handing wealth to your children with no
strings attached? Consider an "incentive trust," which links a
child's inheritance to a certain age or goal. One common scheme schedules
distributions in thirds at ages 25, 30 and 35. But parents can require a
child to finish college before receiving an inheritance, for example. In
addition, special trusts can be set up for heirs who are mentally or
physically handicapped and would risk losing their Social Security
benefits if they got assets outright. About
Retirement Assets Don't overlook retirement accounts. Unlike pensions ,
which die with the pensioner , your 401(k) and IRA assets can be passed on
to heirs, who can keep the assets growing tax-deferred throughout their
lives. For nonspousal heirs, this "stretch" provision
works best if they are designated as beneficiaries on your
retirement-account forms. If they're not and you die before you've started
taking distributions, heirs will have to empty the account within five
years, possibly incurring income-tax liabilities. Talk to your attorney or
an accountant who specializes in retirement plans to avoid this. Now, about the new tax law. Currently, federal estate
taxes take a 49% bite from any amount above the exemption. In 2004 and
2005, the exemption rises from $1 million to $1.5 million, then to $2
million in 2006, and so on until the tax disappears for a year in 2010. But tax experts aren't counting on it to make estate taxes irrelevant, and neither should you.
Copyright
© 2002 Global Action on Aging |
