The Importance of Estate Planning and Determining Your Net Worth
The purpose of estate planning is to prepare to transfer your assets to others upon your death. Estate planning allows you to specify where each of your assets goes upon your death.
Estate planning used to be of importance only to the very wealthy. But even middle-income earners who do a good job investing throughout their lifetimes can benefit from estate planning. Regardless of how much you have, it's important to understand the basics of estate planning so that your financial and philanthropic goals are met even after you're gone.
For 2013, the exclusion amount was raised to $5.25 million from $5.12 million in 2012; and the top tax rate was increased to 40% from 35%. Currently, the estate tax is under heated debate, as the U.S. government policy makers are trying to close the deficit gap.
Before going any further, it is important to point out that property laws can vary widely from one state to another, and that estate planning is a very complex subject. This section is intended to inform rather than to advise, and should be used only as an introductory guide. As you begin the estate planning process, be sure to consult with an estate attorney and financial professional in your state.
Net WorthThe first step in estate planning is to figure out what you have (or guess as accurately as possible what you will have when you die). Your estate includes all of the assets you own-such as investments, real estate and other property, cash retirement accounts, life insurance, personal possessions, interest in a business, and anything else of value. If you have any debts, these should be subtracted from your assets to determine your overall net worth.
Keep in mind that the seemingly simple concept of 'ownership' isn't always so simple. Sometimes an asset is owned by more than one person. For example, 'joint tenancy with right of survivorship' means that if one owner dies, the other becomes the full owner. 'Tenancy by the entirety', which only exists in some states, covers property owned jointly by spouses. And some states recognize 'community property' between spouses as distinct from separate property. Laws vary from one state to another, and the laws can be confusing, so be sure to know which laws apply to you if you own any shared property.
Once you've determined what you own, estimate how much you'll have to pay in taxes. In addition to federal taxes, some states have estate taxes (paid by the benefactor) and some states have inheritance taxes (paid by the beneficiary). Once you've estimated the tax impact, you'll have a better idea of how much your beneficiaries will actually receive.
Future Healthcare DecisionsAlthough strictly speaking it's not part of estate planning, another important activity is making decisions about future healthcare. A living will is a description of how you want future healthcare decisions handled in the event that you become incapacitated and are unable to make those decisions on your own. Although this possibility isn't pleasant to think about, it's important to address this issue so that your wishes can be followed even if you aren't able to communicate them at that time. Living wills specify such things as the use of life-sustaining procedures and artificially provided nutrition.
"Durable power of attorney" is a status which you can confer to another person (such as a spouse or other close relative), enabling them to make decisions on your behalf if you can't make them on your own.
An "advance directive" (sometimes called a "healthcare directive") combines a living will and durable power of attorney, either in one document or two separate ones.
In addition to an advance directive, you might also want to consider conferring power of attorney for your assets, to be sure that your financial wishes can be acted on in the event that you become incapacitated.
If you don't have any of these documents set up, the state laws will make these important decisions for you if you ever can't do it on your own.