Estate Planning Basics To Know Right Now
Why should you consider estate planning? Because dying isn't cheap. There's the unforeseen medical bill to cope with. Then there's the funeral director, and, of course, the estate planning lawyer. Even the tax collector would like to get into the act.
Careful planning can cut the costs of all these things. Your estate, particularly in this age of spiraling salaries and real estate values, could be ample. The bottom line is, give everything away. The catch, naturally, is that you want it to go to the correct people— not to the state, not to Uncle Sam, and not to the funeral director.
Here are some of things to include on your estate planning checklist: drawing up a will, planning gifts to your family, establishing trusts, buying adequate insurance, timing the sale of your home, and preplanning your funeral. With these tips you can save thousands—even tens of thousands—of dollars to pass on to your family. Here's how.
Giving Money Away
Why should you give your money away? That's the whole objective of estate planning: to retain as much of your wealth as possible for your heirs, and to pass it on to them with the least amount of trouble. Don't give away anything that you will miss. Your own security is significant. But remember that when you die, it may take a year or longer to probate your will, which means get it through the legal process. Until that's finished, and until all your debts are paid, the executor won't be able to give out anything to your heirs.
You no longer have to give large amounts of money away so that you pay a lower gift tax than estate tax. That's because the two rates are now the same. And any gift tax you pay now will discount any estate tax you'll owe after death. The federal government and many states that abide by federal guidelines allow you to give away these sums without paying any taxes:
$10,000 per person per year
$600,000 over your lifetime
Gifts to spouses throughout your lifetime are not taxed (some states expect you to give at least part of your estate to your spouse). Gifts to charities are not taxed as well.
Learn When You Should Give
When you give gifts, may make a difference in estate taxes. Some states retain a law that the IRS has abandoned: If gifts are given within three years of death, they continue to be subject to estate taxes.
Who Should Pay Estate Taxes?
Federal estate taxes should be paid on estates larger than $600,000. If your estate is smaller, it would pass essentially intact, except for debt settlement and legal fees, to the heirs you name in your will.
Sell Your Home to Your Children
As you grow older, your properties may become as much a liability as an asset. This becomes particularly true if you must require nursing care. Often, a parent intends to leave a house to children but has to sell the home to cover the costs of nursing care.
If you're a sole surviving spouse in retirement, here's something to consider: Don't own your home. Alternatively, sell it to your children and rent it from them. By investing the proceeds from the sale, you ought to be able to pay a fair rent to your children—enough to cover their mortgage and taxes. You break loose of capital gains (income) taxes on your residence up to $125,000 if you're past age 55. If the children can't afford a down payment, consider making the down payment a gift (up to $20,000 if both parents are living).
This arrangement has the same outcome as a reverse mortgage, except that your children will realize the profit from selling your home years later, when you're gone. With a reverse mortgage, the lending bank gains all that profit.
Sustain Your Family's Lifestyle
If you're a breadwinner, how will your family's lifestyle be maintained without your income? Plan for family income by having enough savings and insurance—life insurance to supply income after you're gone, and adequate health insurance so that your estate isn't plundered by soaring medical costs before you expire.
Mind College Costs
How will your kids afford college? You must have adequate savings or a trust fund that will take care of college costs. The College Savings Bank of Princeton, New Jersey, has a plan that helps you approximate the cost of a particular school and through savings and investment, cope with these costs. You may also want to consider paying tuition now with a guarantee that costs will be covered when your kids go to college. Beware: Your child would have to make the grade and want to attend the school where you prepaid. Many states and Congress are considering such plans to let the tuition to be spent at any school.
Cut down on Pension Payments
Consider taking a smaller monthly pension payment if it assures that your spouse will keep on receiving the payment upon your death. Remember, a nonworking spouse who is suddenly thrown into the job market would have fewer years to accumulate retirement credits or savings. Most nonworking spouses are women, and they likely would earn less upon returning to a job, since women as a whole keep on earning less than men, even for similar work. Be sure your spouse is the beneficiary of your Individual Retirement Account (IRA), Keogh Plan, 401(k) account, and company pension plan if you die before retirement.