Estate Planning

If you're like many people, estate planning is a chore that is being put off till tomorrow,
and then the day after tomorrow. The problem is inertia and fear. There's the hassle of finding a
lawyer, making difficult choices and plans. And worst of all, estate planning is associated with
death. Who wants to deal with that?

But the price of procrastination is heavy. You're sacrificing your family's security.
You're risking the hard-earned assets that you've intended to leave for your children; your assets
may end up, instead, in the hands of lawyers, court administrators, creditors or the IRS.

Dying Without a Will
Take, for instance, the simple estate planning tool of a will. Seven out of ten Americans
at present do not have a valid will. If you die without a will, your estate will be divided
according to the laws of your state, and not according to your wishes. Your home, or other
assets, could end up in the hands of a total stranger. With a will, you decide who gets what of
your estate.

Perhaps the most tragic result of dying without a will is that parents give up their say in
who'll bring up the minor children if they both die. In such a case, courts are forced to decide
the fate of the children.

Minimizing Your Taxes
A carefully drawn estate plan ensures the financial future of the family, particularly the
special needs of the children or other members of the family. But you need to go beyond
providing for the security of the family. You want to make sure that your estate is not
unnecessarily depleted by taxes.

Recent changes in tax laws have done away with many of the popular techniques of the
past to avoid taxes, but there are still plenty of opportunities left to reduce, even eliminate
entirely, the tax bill so that your children will get the maximum inheritance due them.

The perils of not planning are substantial. Although you'll escape the federal estate tax
entirely if your taxable estate is below $600,000, the tax on estates over $600,000 start at 37%
and reach the punishing level of 55%. Inflation in real estate values has pushed many of the
modest estates into taxable levels, and the whopping tax bill may come as a shock to your heirs.

Say your taxable estate is $700,000, barely above the zero-tax level. The federal estate
tax will get a bite of $37,000 before your heirs get anything. At $1,000,000, Uncle Sam will get
$153,000. As you can see, this is no small matter to leave to haphazard planning. Fortunately,
the tax law gives us plenty of loopholes.

Marital Deduction Loophole
The biggest loophole is reserved for married persons and is the so-called 'unlimited
marital deduction.' The government will let you give during your lifetime or bequeath at your
death as much property as you wish to your spouse, all tax-free. Without this loophole, the
estate tax can be levied first, say, on the husband's death, and then again on the same property,
when the wife dies.

That brings us to the problem of how to avoid tax on the death of the second spouse.

Pass Up To $1.2 Million Tax-Free
A bypass trust (also called family or credit-shelter trust) allows husband and wife to take
full advantage of the individual $600,000 estate tax exemption and pass as much as $1.2 million
tax-free to the children. Under this arrangement, you'd transfer assets worth up to $600,000 to
the trust tax-free. The balance goes directly to your spouse, and due to marital deduction, there
would be no estate tax on this transfer.

Your spouse will be entitled to the trust's income and usually up to $5,000 or 5% a year
of the trust principal. For certain necessaries of life, he or she can even invade the trust for
larger amounts. After your spouse's death, your children or other heirs will receive the trust
assets. The beauty of this arrangement is that upon your spouse's death, as long as his or her own
assets were less than $600,000, again there would be no estate tax.

Gift Loophole
Say your estate is worth $800,000. Without any planning, the federal estate tax could be
as high as $75,000. How can you trim or eliminate this bill?

Fortunately, the tax law gives everyone a simple but powerful loophole. You can give as
mush as $10,000 ($20,000 between husband and wife) a year to as many people as you wish and
not pay any gift tax. You can also make tax-free gifts of any amount to charities and unlimited
payments to health care and educational institutions for a relative or friend's medical or tuition
bills. A planned gift-giving program can make sure that your children will be the beneficiaries
of your estate, and not Uncle Sam.

Probate
A bigger problem than taxes is the problem of probate. When you pass your property to
your heirs by a will (worse yet, without a will) it must go through probate. Probate is the legal
process by which your will is proved valid in court. Your assets are inventoried, potential heirs
notified, creditors paid off, tax returns filed, and finally, whatever is left is distributed to the
heirs. In many cases, a lot has been taken out by attorneys, executors, court administrators and
others. Attorney's fees, fixed as a percent of the gross estate, can run into thousands of dollars.

To cite just one example: To probate an $800,000 estate in California would cost
$34,300 in executor's commissions and attorney's fees. You may find the inequity of such a fee
structure appalling, but that's why probate is such a lucrative practice for many
attorneys. But this is not all. Depending on the complexity of your estate and the efficiency
of the probate cost, the process can take anywhere from a few months to several years before the
beneficiaries can receive their inheritances. ThereÆs, however, a solution.

Living Trust
You can avoid the agony of probate with a living trust. The trust would be revocable so
that you can change its provisions at will or even eliminate it entirely. During your lifetime, you
(and your spouse) remain trustee of the trust. The formal title to the assets is transferred to the
trustee, and you maintain full control over these assets. Upon your death (or your spouseÆs
later death) the assets are transferred to the beneficiaries without the hassles and costs of
probate.

MinorsÆ Trust
One of the basic aims in your estate planning is to provide security for your children. A
prominent tool in this regard is the irrevocable 2503(c) minorsÆ trust. Although the new laws
have taken away some of the income tax benefits, there are still left considerable other
advantages.

You can use such a trust to provide for your childÆs college education. You can keep
the trustÆs income and principal out of the beneficiaryÆs hands until he or she reaches the age
of 21, when the child will be mature enough to handle the inheritance. The trust assets will stay
out of your taxable estate and will escape federal estate tax. Estate planners point out that by
splitting income between the trust and the minor, you still might be able to cut your income tax
bill.

If youÆre concerned about providing for your children in the event of your untimely
death and keeping the estate out of the hands of your spouseÆs future mate, ôQTIPö trust is your
choice. Your spouse will get lifetime income from the trust, but the principal goes to your
choice of beneficiaries when your spouse dies.

Life Insurance Trust
Life insurance brings instant liquidity to your estate - a relief that evades many a estates.
You hear of ôestate salesö which are designed to raise fast cash to pay estate taxes by selling real
estate or other prized possessions at fire-sale prices. Life insurance would take care of such an
emergency.

But you also want to make sure that the life insurance proceeds are kept out of your
taxable estate so that your family will have the full benefit of the instant liquidity. A life
insurance trust will be an answer - if you donÆt die within three years of setting it up. This is
where youÆll need expert advice. You want to make sure that you do not retain any "incidents
of ownership," otherwise the IRS will come back and tax the insurance proceeds in your estate.

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