Cents and Sensibility
Cents and Sensibility
Question: I've heard of the nightmares of probate and want to avoid it at all costs! What should I do regarding proper estate planning? Estate planning can
preserve your assetsAnswer: It's important to distinguish between your probate estate and your taxable estate. Your taxable estate consists of the value of your gross estate (the fair market value of all your assets), less any deductions. The estate tax is a transfer tax the U.S. government imposes on the assets or property you transfer to other people at the time of your death. These taxes can consume up to 55 percent of your estate. Here are some points to keep in mind:
>> Take advantage of estate-tax exemptions: Under current law, you can transfer up to $675,000 in assets free of federal estate taxes upon your death. The amount of the tax exemption, called the unified credit, was to be gradually increased to $1 million by 2006. However, a new law allows for death-time transfers of up to $1 million in assets free of federal estate taxes beginning in 2002, four years earlier than under current law. The amount of the exemption is increased to $3.5 million prior to repeal of the estate tax in 2010.
For example, under current law, if Mary Smith passes away in 2001 with a taxable estate valued at 1 million, her heirs would have to pay estate taxes on the amount of Mary's estate that exceeds $675,000. Consequently, Mary's taxable estate would be approximately $325,000. Under the new law, if Mary dies in 2002 with an estate valued at $1 million, her estate has no federal estate tax liability.
>> Plan for incapacity: We've talked about planning for your survivors upon your death, but what if you are unable to manage your affairs while you are alive? A durable power of attorney allows you to designate someone to manage your financial affairs. This person is known as your attorney-in-fact. A health care directive, or proxy, can be drafted to allow someone to make certain health care decisions for you if you're unable to do so yourself.
>> Protect your assets with insurance: Medical expenses in your later years can devour the estate you've worked so hard to accumulate. Even worse, you may end up drawing on your children's or family's resources as you struggle to pay for nursing home care. Long-term care insurance and life insurance can help. For example, life insurance can protect your survivors from the loss of your earning capacity and can provide cash for your family to help pay taxes and/or expenses when settling your estate.
>> Assemble your team: Now that you know some of the issues to begin the estate planning process, the next step is to put together a team of professionals to help you make the right decisions.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com