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By developing an estate plan, a person can ensure that property will be distributed to family members and others in a way that is consistent with his or her tax and non-tax objectives. Some of the most common goals when developing an estate plan include
• ensuring that assets are transferred to the intended beneficiaries;
• reducing estate administration costs, including attorneys’ fees, executors’ fees, and probate costs;
• reducing or eliminating federal estate and gift taxes;
• formulating a succession strategy for family businesses;
• leaving a financial legacy for children and grandchildren;
• making charitable bequests;
• planning for illness or incapacity; and
• selecting guardians, personal representatives, and other fiduciaries.
Ensure Intended Disposition of Assets
Perhaps one of the most important reasons to establish a basic will and other estate planning documents is to ensure that assets will be transferred to the intended beneficiaries. In some cases, however, a person may not have prepared any estate planning documents whatsoever. If a person dies without a valid will—a condition known as intestacy—the laws of the state where the person lived will govern the disposition of the decedent’s property. Through state intestacy laws, the state, in effect, writes the will for a decedent and determines how his or her assets will be distributed, regardless of the intentions or desires of the deceased. Although each state has its own intestacy laws, each state’s statutes typically follow a similar distribution pattern as shown below:
• If there is a surviving spouse and a child, each will receive one-half of the estate.
• If there is a surviving spouse and two or more children, the spouse will receive one-third of the estate, and the children divide the remaining two-thirds equally.
• If there is a surviving spouse and parents but no children, the spouse will receive between 50 and 75 percent of the estate, and the parents receive the remainder. In some states, the spouse will receive all the property, while in others, the surviving parents, brothers, and sisters will also receive a share.
• If there are surviving parents but no spouse or children, the parents receive the entire estate.
• If there are surviving siblings but no parents, spouse, or children, the siblings receive equal shares of the estate.
As these points illustrate, property is generally bequeathed to the people most closely related to the decedent by blood, marriage, or adoption. While many people might be under the impression that the surviving spouse automatically inherits everything, this may not be the case. In fact, in some states, the surviving spouse may have to share the estate with the decedent’s parents or siblings. And, in the unlikely event that a person dies intestate without any living relatives, his or her estate will go to the state—which should be incentive enough for any person to prepare a basic will. Moreover, when a person dies intestate, the probate court will appoint a third party as the administrator of the decedent’s estate (who may or may not be the person the decedent would have chosen to oversee his or her affairs). The probate court will supervise the administrator’s work closely
and may require the posting of a bond to ensure that the estate will not be charged with the costs of any errors made by the administrator. Of course, the cost of this court involvement will be expensive, and these expenses will be paid out of the estate before it is distributed to heirs. In sum, intestacy almost invariably increases the cost of settling an estate.
Reduce Estate Administration Expenses
After a person dies, certain steps are required by law to help settle the decedent’s affairs. Estate administration—also known as estate settlement—involves gathering and inventorying a decedent’s property, paying off all debts and claims, satisfying specific legacies, and distributing the property. With some estates, this process can be completed within a matter of months, while other more complicated estates may take several years. The administration of a person’s estate is overseen by the probate court, which settles questions about the ownership of property and the payment of debts. Settling a decedent’s estate, regardless of its size, can be costly. Various administrative expenses are likely to be incurred by all types of estates, including appraisers’ fees for valuing property, professional fees for attorneys and accountants, and probate costs. Clients concerned about estate shrinkage due to administration expenses are naturally interested in minimizing these costs, which increase along with the value of the gross estate.
Reduce Federal and State Estate Taxes
Perhaps one of the most important reasons to execute a will and to develop an estate plan is to minimize federal and state estate taxes. The federal estate tax is a tax imposed on the transfer of property to a beneficiary at death. It kicks in when the total estate—including investments, retirement plans, insurance proceeds, real estate, and other property—exceeds certain limits. As the following table shows, the federal estate tax is imposed only if a person’s taxable estate is more than $3.5 million. The estate tax is due to expire in 2010, but unless Congress makes the current law permanent, the tax will return in 2011. At that time, the exemption equivalent—i.e., the value of an estate that will be exempt from the federal estate tax—will once again be $1 million, and the top tax rate will be 55 percent.
While there are many estate planning tools and strategies that can be used to formulate an effective estate plan, perhaps none is more important than the will. Wills can generally be thought of as the foundation of a person’s estate plan. Through a will, an estate owner can direct how his or her property is to be distributed after death. A will also recites the estate owner’s wishes with respect to the care of dependents and the administration of the estate. Keep in mind that not all property passes via a will. Many types of property or forms of ownership pass by operation of law or by contract, such as:
• jointly owned property
• property held in trust
• life insurance payable to a named beneficiary
• retirement plans payable to a named beneficiary, including IRAs, Keogh accounts, 401(k) plans, and pensions
• bank accounts payable to named beneficiaries upon the depositor’s death
• transfer-on-death stock accounts payable to a named beneficiary
Advantages of Wills
Aside from avoiding the disadvantages of intestacy, there are several advantages to having a valid will.
Choice of Executor and Guardian
Choice of Alternate Beneficiaries
Another common estate planning tool is the trust, which is a legal arrangement in which a person (the grantor) places assets that are for the ultimate benefit of a third party (the beneficiary) under the control of a trustee. The trustee holds title to the property, is bound by the grantor’s instructions, and is required by law to make decisions that are in the best interest of beneficiaries. The trustee can be a natural person or a legal person, such as a corporation or bank.
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