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Planning Your Estate
The Importance of Estate Planning and Determining Your Net Worth
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
Many people spend more time planning their vacations than planning their estates. This is
probably because the vacation will happen sooner and because it's much more fun to plan. However, estate planning is much more important but requires more time and effort. Without a comprehensive estate plan, a significant part of the work you've done throughout your life, both at your job and with your investments, can be lost or given to unintended beneficiaries.
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. This involves deciding who the beneficiaries will be, what each will get, and how to perform those transfers with the minimum tax consequences, while making sure that the estate has enough liquidity to meet its obligations.
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.
The level at which estate taxes begin is set to increase over the next several years: $1 million in 2003, $1.5 million in 2004-5, $2 million in 2006-8, $3.5 million in 2009, and a fullrepeal of the estate tax is currently planned in 2010. (Of course, this is subject to change, as any tax
law is.) Estate taxes become very expensive at about $2 million, and can reach as high as 55% for very wealthy individuals!
Before going any further, it is important to point out that propertylaws 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 Worth
The 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, cashretirementaccounts, 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 networth.
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 ownerdies, 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.
Although 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 advancedirective, 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.
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