When you hear the term “estate planning,” you may think it applies only to the very wealthy. But the truth is that everyone should have a basic plan — and the sooner you start thinking about it, the better.
The first step is to establish and maintain a comprehensive list of all of your assets, including the details of title and ownership. These could include your investments, retirement savings, insurance policies and real estate or business interests. Then you can determine how you’d like those assets distributed.
Wills and Trusts
The most basic estate planning document is a will, which states how you want your assets and property distributed upon your death. In the will, you will designate an executor, or personal representative, who will be responsible for paying any final bills, overseeing finances while the estate is being settled and filing a final income tax return. If you have children who are minors, you can name a guardian for them in your will.
If you’re married, you and your spouse can pass an unlimited amount of assets to each other free of federal estate taxes. If you plan to distribute your assets to someone other than your spouse, no estate taxes will be owed if your estate is less than $5.34 million, due to the federal gift and estate tax unified credit. This amount is adjusted annually for inflation. If one spouse dies, any unused portion of their exemption is transferred to the surviving spouse, which could increase your exemption up to $10.68 million. However, even if no federal taxes are owed, some states assess estate or inheritance taxes.
If your estate will be more than $5.34 million, trusts may help reduce the size of your estate and associated taxes. A trust is established during your lifetime and can serve many purposes, such as holding a life insurance policy, benefiting a charity or giving money to heirs in incremental gifts throughout their lifetimes.
Another strategy for reducing your estate size is lifetime gifting. Estate planning often focuses on what happens to your estate after you die, but making gifts during your lifetime can provide timely assistance to the recipient and tax benefits to you. You may prefer lifetime gifting primarily for the immediate satisfaction of seeing your loved ones enjoy your generosity.
Every year, you can give up to the gift-tax annual exclusion amount — $14,000 per recipient in 2014 — free of federal tax. If you’re married, your spouse can match your gift, bringing the maximum total you can give each person to $28,000. You can make a series of tax-free gifts over several years to reduce the size of your estate without reducing the federal estate tax exemption you qualify for.
Determine early on if and how much you’d like to leave for charity or personal gifts while you’re alive and create a plan to carry out that decision.
Another key aspect to estate planning is ensuring your loved ones know what to do if you were to fall ill or have an accident that leaves you incapable of communicating your wishes. Although these are unpleasant circumstances to contemplate, it’s important to address them now to ensure that your financial affairs will be handled sensibly and you’ll receive the medical treatment you desire.
To make sure your family and health care providers know your wishes, you can establish two types of advance medical directives:
- A living will, which documents the types of life-sustaining treatments you wish to receive, if any, should you become incapable of making decisions for yourself
- A durable power of attorney for health care (sometimes called a health care proxy), which authorizes a trusted person to make medical decisions for you if you’re unable to do so yourself
You’ll also want to designate a durable power of attorney for finances to act on your behalf.
Don’t Keep It a Secret
Ensure family members or other trusted people know how to locate your estate planning documents and your financial advisor’s contact information. Creating an estate plan can be complex, so it’s wise to seek assistance from an estate-planning professional.
— By Erin Eddins
Erin Eddins is a Certified Financial Planner and Chartered Financial Consultant with Stancorp Investment Advisors in Lynnwood.