Estate Planning Basics


Estate attorneys rejoiced when Congress agreed to a deal to address the so-called “fiscal cliff”. Finally, after a decade of not knowing what would happen to federal estate taxes, lawmakers settled the matter when The American Taxpayer Relief Act of 2012 became law. As a reminder, the estate tax exclusion, which is the value of an estate that earns a credit against the tax due (the “basic exclusion amount), was set to revert to $1 million per person from the 2012 level of $5.12 million, and the top estate tax rate was due to rise to 55 percent from 35 percent. With the enactment of the new law, the basic exclusion amount will permanently remain at $5.12 million and that amount will adjust higher with inflation in the future, and the tax rate will increase to 40 percent. So for this year, the exclusion amount is $5.25 million.

Clarity on the estate tax means that there’s no excuse for failing to prepare or update your estate documents now. Here are the basics that you need to consider:

WILL: A legal document that ensures that your assets are passed to your designated beneficiaries, in accordance with your wishes. In the drafting of the will, you will name an executor, the person or institution that oversees the distribution of your assets.

Your will can itemize where every asset will go, or you can draft a Letter of Instruction, which details your wishes as an attachment to your will. A Letter of Instruction can make it easier to change your mind about distributions, without having to redraft the entire will.

If you have minor children, you need to name a guardian for them in your will.  If you die intestate (without a will,) your state of residence will determine what happens to your estate and who should raise your kids. That potential alone should prod you to get going with the process.

PROBATE: The legal process by which a state court officially appoints the Executor and accounts for the deceased’s property and assets, as well as debts. Probate is a public process, which can be lengthy and costly, but usually goes fairly smoothly, as long as the estate is not contested by any heirs.

HEALTH CARE PROXY: The document that allows you to appoint someone to make health care decisions for you if you lose the ability to make decisions for yourself.

LIVING WILL: Similar to a health care proxy, though in many states, a living will is not a legal document and medical decisions may not be based on it alone. However, it is a way to communicate what types of medical treatments you would or would not want.

POWER OF ATTORNEY: The form that allows you to appoint someone to act as your agent in a variety of circumstances, like executing a trade, withdrawing money from a bank or responding to a tax inquiry.

TRUSTS: Like a will, a trust can be used to transfer assets and detail your wishes to your heirs. (Guardianship can only be addressed in a will.) There are various types of trusts, but the one that is often used to avoid estate taxation for married couples is called a “Credit Shelter Trust”. This type of trust is structured so that each spouse can utilize his or her basic exclusion amount, thereby allowing couples to pass up to $10.5 million federal tax-free to their heirs in 2013. While there aren’t too many people who are subject to federal estate taxes (the IRS said 15,000 estate tax returns were filed in 2010), a gross estate can add up quickly when life insurance proceeds and real estate assets are included. Also, estates may be subject to state taxes, so be sure to check with your attorney to determine whether a trust may be advisable.

Many people prefer to use trusts, even if their total estates are below the tax limit, because assets held within trusts avoid probate. A trust also allows a maximum amount of control over disposition of those assets.

Because these are legal documents, it may well be worth the money to hire an estate attorney to draft them. To keep your costs down, make sure you know how you want your assets distributed before you set foot inside the lawyer's office. The whole process often takes only 5 to 10 hours, a relatively small investment of time, considering the importance of the issue.