Young or old, married or single, wealthy or middle-class, with or without children, everyone needs to formalize their final wishes in some type of estate plan. This is the best way to assure that your family and your finances are properly taken care of when you are gone.
Without an estate plan a court will determine your fate and the fate of your assets. Not only can this be costly for your heirs, but it is also highly likely that the courts’ decisions will not reflect your goals and intentions.
To make sure your wishes are carried out correctly, you’ll need to document how you want your money and assets distributed. Here are some of the basics to consider when protecting your estate.
- Establish a Power of Attorney- Appoint a person you trust to handle your financial decisions. Keep in mind that Power of Attorneys (POAs) can be general and include many powers or can be limited by restricting certain powers.
- Draft a will and final letter- Make sure to list how you want your assets distributed. Name an executor for your estate; remember to designate a guardian for your children if they are minors and detail how debts, taxes, probate fees and your heirs living costs are to be paid while the will is in probate.
- Review your beneficiary designations- Review your beneficiary designations on your life insurance and retirement accounts and make sure these are in line with your wishes, because they automatically transfer to the designee without regard to wills, trusts and probate.
Formalize your meeting with a qualified estate planner who’s up- to- date on the latest statutory, regulatory and judicial developments. Then let your loved ones know where to find important documents, including an inventory of financial accounts and assets such as real estate, outstanding loans and insurance policies.
By planning ahead, you’ll make it easier for your loved ones during a time of grief.
Estate Tax Law Changes
The new law targets the wealthy and clarifies rules for smaller estates, but keep in mind that it also applies only for 2010, 2011 and 2012. While the long-term fate of the estate tax is still in limbo, here is what you need to know now.
If you have a will, or other estate-planning document tied to the old law, you will need to check with your attorney about possible revisions and changes.
Previous Estate Tax Law
The 2001 Bush tax cuts reduced the estate tax over several years and eliminated it altogether in 2010. However, estate taxes were to be reinstated in 2011 with a $1 million estate exemption level and a 55% tax rate unless new regulations were put in place. Luckily for those with sizeable estates, regulatory changes were made.
The New Regulations
The new law allows an individual to leave up to $5 million to their heirs before the estate tax kicks in and for amounts over that, the tax rate is a flat 35%. Married couples can pass up to $10 million to heirs tax-free. If the first spouse to pass does not use up their full $5 million exemption, the leftover amount can be added to the second spouse’s exemption, so the full $10 million can still be used. Under the old laws you needed a special trust to do this.
Choices for Executors
Another important factor applies to those who passed in 2010. Executors have the choice of using the 2010 no-estate-tax rules or the 2011 $5-million-exemption plan.
Choosing the 2010 no-estate-tax-rules also eliminates the automatic step-up in tax basis for inherited assets. The step-up allows inherited assets to be valued at the date of death so all appreciation prior to that time becomes tax-free. The 2010 law assigned a “modified carry-over basis,’ which means that the heirs are required to use what the original owner paid for the asset and the capital-gains tax bill on the appreciation that occurred prior to the original owner’s death at the time when they eventually sell the assets.
The executor can choose whichever rule is a better deal for the heirs, so it is important that anyone working with an estate based on a death in 2010 be aware of these options and consult their advisors for guidance.