The Basics of Estate
Estate planning is often only considered essential for wealthy or older
individuals. If you have loved ones, however, you should have some form
of estate plan regardless of your level of wealth.
1. Estate planning means providing for your family after you are gone.
It allows you, not the court, to make important decisions about caring
for your loved ones and the disposition of your property.
2. With a proper estate plan you can make these major decisions.
3. Who do you want as the executor to settle your estate? That person
should be someone who is qualified, trustworthy and understands your wishes.
4. How will any minor children be protected? This includes naming a guardian
on the death of both parents and making decisions about the future financial
security of the children.
5. How will your assets be distributed? Wills are used to designate who
will receive your assets. Trusts may be useful for the ongoing management
and distribution of your assets.
6. How can the costs of administrating your estate be minimized? Proper
planning can reduce probate fees and any estate taxes.
Federal Estate Taxes
The tax treatment of estates has been changing almost yearly for several
years. The American Taxpayer Relief Act of 2012 clarified many of the
rules and has made many provisions permanent. These changes should prompt
everyone to have their estate plan reviewed.
How does an estate get taxed?
The federal government levies a tax, payable by your estate, with rates
up to 40% on the largest estates. The tax is charged against the value
of the estate after allowable deductions are taken. Deductions include
burial expenses, existing debts, charitable contributions and accrued
taxes. In addition, any assets left to a surviving spouse are not included
in the taxable estate. After the estate tax is calculated, there is a
credit against that tax. The result is that many estates pay no tax. The
amount of the credit is increasing and below is a chart indicating the
size of taxable estates that will be subject to tax after the credit.
size where taxation starts
estate tax rate
You should note that
the tax is levied on the fair market value of your assets and not the
cost basis. For many individuals, the values of their stock portfolios
or small business interests have grown significantly over the past few
Issues For Younger People
Choosing a guardian for your children is critical. If both parents die
and no guardian is named, the court will decide on someone to care for
your children. That is probably a choice you want to make yourself. Life
insurance may be appropriate to ensure there are funds for the ongoing
care and support of family members.
Issues For Older People
As people age and accumulate wealth, the need for life insurance may dwindle.
The nature of their estate plans becomes more focused on the financial
aspects - minimizing any estate taxes, establishing trusts for surviving
family members and deciding who receives financial assets and other personal
Use an Expert to Create and Update Your Estate Plan
Estate planning is not a task to be taken lightly. Rules are complex and
may differ by state. A qualified attorney can ensure that your estate
plan accomplishes your objectives.
An estate plan should be reviewed periodically (generally every 3 or 4
years) as your situation or the rules change. Births of children, changes
in marital status, increases in income or wealth, or moving to another
state should also trigger a review of your estate plan.
The new (and confusing) rules should prompt almost everyone to review
their estate plan. It is important that your will and other documents
take the new laws fully into account.