ESTATE PLANNING & TAXATION

OVER 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:
• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

YOUNG AND SINGLE

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

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UNMARRIED COUPLES

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

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MARRIED COUPLES

Married couples are effectively treated as one economic unit for federal gift tax and federal estate tax purposes, as long as each spouse is a U.S. citizen. This is accomplished using the unlimited marital deduction--a powerful estate planning tool, because you can conceivably give or leave your entire estate to your spouse tax free. The deduction not only allows spouses to shift wealth between each other without incurring gift tax or estate taxes, but also allows spouses to maximize the benefits that result (e.g., equalizing your estates to take full advantage of the applicable exclusion amount). This is especially important since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act) signed by President Bush on June 7, 2001, which has increased the exclusion amount (as described in a following section). Married couples should also consider creating a bypass or credit shelter trust.

MARRIED WITH CHILDREN

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time.

Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

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COMFORTABLE AND LOOKING FORWARD TO RETIREMENT

If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

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WEALTHY AND WORRIED

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax was eliminated in 2010.  The gift tax, however, remained in effect at a 35 percent rate.

On January 1, 2011, the estate tax returned. According to a law enacted in December 2010, estates valued at $5 million or less are exempt from the tax.  Estates more than $5 million are taxed at a 35 percent rate.

For individuals who died in 2010 the estate has an option of following the 2010 estate tax rules meaning no tax due on the estate but limited “stepped up basis” rules or using the 2011 estate tax rules which would allow all of the heirs to inherit assets with a tax basis with a “stepped up basis” equal to market value at the date of death for income tax purposes.  This is important because opting for the 2010 no estate tax rules will mean some inherited assets are then subject to capital gains tax which can actually raise the tax burden for some heirs.

The Executor of the estate makes this election and must file an estate tax return by September 17, 2011 if he or she chooses to have the 2010 rules apply.

As you can guess, this is a complicated issue and each estate must be looked at very carefully before a determination can be made as to which option to choose.

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ELDERLY OR ILL

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.

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