Estate planning is one of those chores that's typically left on the back burner. After all, who enjoys contemplating a time when they might become incapacitated--or worse?

But by not planning ahead, you can cook up disastrous consequences for your family. Dying intestate, or without a will, places management of your estate into the hands of your state probate system. Despite any intentions you might have had, the state will use its own formula to determine how and to whom it will transfer your property--a costly process that can take years, delay distribution of your property, and leave it vulnerable to creditors' claims.

A carefully constructed estate plan ensures that you're in charge of your estate, whether you become seriously ill or die. A plan also can eliminate probate and minimize federal estate taxes and other expenses.

Drawing up a will is the simplest form of estate planning. It lets you name the person who will manage the estate (the personal agent or executor), your heirs and what portion of your property each will receive, and guardians for minor children.

If your property's value exceeds the current federal estate-tax exemption, you'll require more extensive planning. You and your financial adviser will determine strategies to shield your beneficiaries from federal taxes that can eat up as much as 55% of an estate's value.

While you always should consult a professional, do some homework first. These frequently asked questions will get you started:
    Federal taxes can
    eat up as much
    as 55% of
    an estate's value.

What is the definition of "estate"?
An estate is the sum of all real property (real estate) and personal property. Personal property includes both physical assets (automobiles, furniture, jewelry) and financial assets (savings accounts, investments, life insurance policies, retirement funds). Family-owned farms and businesses also are included in an estate.

It may seem unlikely that your estate is large enough to trigger federal taxes. But once you add up the value of your house, investments, savings, and other assets, it actually may exceed the current estate-tax exemption.

When is the best time to begin estate planning?
Begin planning when your net worth exceeds $25,000 to $30,000, says Michael Janko, executive director of the National Association of Financial and Estate Planning, a for-profit association based in Salt Lake City. Most states exempt small estates from probate, but be aware that the definition of "small" (generally between $5,000 and $25,000) varies by state.

Even people with small estates probably have items they'd like to give to special friends or relatives, Janko says. The only way to ensure that happens is by specifying it in a will. The birth of your first child is another good time to begin estate planning so that you guarantee guardianship and other needs, such as funding for education.

Why do many people set up a living trust?
Every will must go through a public, court-administered process called probate to transfer legal title of property from the deceased to the beneficiaries. The process may be time-consuming and expensive, costing as much as 10% of the value of the estate.

Many people also set up a revocable living trust. It's private, avoids probate, and speeds distribution of the estate to heirs. This entails transferring all allowable assets to a trust that a designated trustee holds and administers for your benefit. You may assign yourself to be the trustee (some states require two trustees), and designate a successor to take over in case of incapacity or death.

A living trust has a companion will that specifies disposal of personal items, places the balance of your property in the trust, appoints guardians for minors, and names the executor.
    Leaving your entire
    estate to your spouse
    isn't necessarily a
    tax-saving strategy.

What is the Unified Tax Credit and how does it help minimize estate taxes?
The federal unified tax credit currently allows individuals a lifetime total exemption of $625,000 from gift and estate taxes. The exemption increases incrementally until reaching $1 million in 2006 (see table). Thus, in 1998, an estate worth $625,000 would owe no federal estate taxes. The exemption doesn't eliminate state estate taxes.

Unified Tax Credit
YearExempt Amount
1998   $625,000
1999     650,000
2000-01     675,000
2002-03     700,000
2004     850,000
2005     950,000

If your estate's value exceeds the estate-tax exemption, you may use the annual Gift Tax Exclusion to lessen the size of your estate and, consequently, the taxes due at death. The Gift Tax Exclusion lets you bestow gifts valued up to $10,000 per year (couples may give up to $20,000) to any number of people, tax-free, as long as the total combined value doesn't exceed the current exemption during your lifetime.

Will my estate be taxed if I leave it entirely
to my spouse?

That depends. There's no federal estate tax on property you leave entirely to a surviving spouse, and there may be no probate if you and the spouse owned assets jointly. But an estate left to a spouse also loses its federal estate-tax exemption. If its value increases to more than the current exemption during the life of the surviving spouse, he or she may leave an estate that owes taxes. The Gift Tax Exclusion and credit-shelter, or by-pass, trusts are options that can minimize or eliminate such a situation.
    Probating a will can
    cost as much as 10%
    of the estate's value.

What is an irrevocable life insurance trust?
This trust is designed specifically to shield life insurance from estate taxes. Upon your death, proceeds from the policy may pay such things as state and federal estate taxes, administrative costs, funeral expenses, and taxes due on a family-owned business. Remember that irrevocable means you cannot dissolve the trust once it's set up.

Whom should I consult to do my
estate planning?

Qualified financial planners, accountants, insurance advisers, and estate attorneys can help you analyze your tax situation and explore options. Unless your estate is so simple that you can get away with a "do-it-yourself" will, only a qualified attorney should draft wills, trusts, and other legal documents. Make sure that your executor, or other trusted person, knows exactly where to find every document related to your estate.

When should I update, amend, or change my estate?
Any number of events may affect your estate plan, including marriage, birth or adoption or death of a child, death of a spouse, divorce, remarriage, major changes in your financial situation, and changes in the tax law. Changes like these may warrant review of your plan with a qualified professional to make any necessary changes.

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©1998 Credit Union National Association, Inc.