Magazine article The CPA Journal

Estate Planning Basics

Magazine article The CPA Journal

Estate Planning Basics

Article excerpt

Estate planning has changed dramatically over the past few years, for reasons that relate to both tax and nontax developments. Many estate planners now recommend that taxpayers execute four documents when they are planning for the future: a testamentary will, a living will, a durable power of attorney for health care, and a durable power of attorney for finances. In addition, recent estate tax legislation should be considered.

Estate Tax Exemptions

The 2001 Tax Act increased estate exemptions and reduced estate tax rates. If a person dies in 2004, no estate taxes will be owed unless the net taxable estate (including prior taxable gifts) exceeds $1.5 million. This exemption will increase to $2 million in 2006, and then to $3.5 million in 2009. The maximum estate tax rate is reduced to 48% in 2004 and then drops 1% each year in 2005, 2006, and 2007. The rate will remain 45% in 2008 and 2009 before dropping to zero in 2010. If Congress does nothing to change the law, on January 1, 2011, the exemptions and estate tax rates will revert to the 2001 levels. Most commentators anticipate that there could be an estate tax implemented by 2011 but believe that the exemptions will remain at a high level.

With the present exemption of $ 1.5 million, most taxpayers will not owe any estate tax. Those taxpayers with a taxable estate exceeding the exemption will continue to try to minimize the tax owed, typically by taking advantage of various types of trusts and lifetime giving programs.

Formal Testamentary Will

Will preparation is a crucial estate planning activity, although estate planners need not always serve as executors. If a taxpayer dies without a will, state statutes and a probate judge will dictate who receives the deceased's assets. The intestate succession statutes, which set forth who will receive property, generally protect immediate family members. State statutes vary on what property passes to whom upon the death of an individual, but spouses and children are typically the priority heirs. Individuals uncomfortable with the heirs specified in their state's statutes should execute a will to set forth an acceptable plan for the distribution of their assets. Any person at least 18 years old and of sound mind may lawfully execute a will.

There are some key advantages to having a will even if one is content with the heirs listed in the state statutes. For example, a will is the proper vehicle for designating the guardian for minor children. One can also designate a personal representative responsible for inventorying the estate, paying debts, and distributing the excess pursuant to the will.

Other key advantages of a will are that it allows for bequests to charities, bequests in unequal proportions, and specific bequests of personal items. State statutes adopt a rigid format for distributing assets, and the assets are always distributed outright. In many cases, testators may not want a mathematically equal distribution of assets among heirs, and may not want certain assets (e.g., the family farm) divided or liquidated.

Another benefit of having a will is that the grieving heirs will be able to read the specific wishes of the deceased. This helps many people to deal with the grieving process. If the heirs have no will to read, they are sometimes left with uneasiness about the deceased person's true wishes. Unfortunately, that uneasiness frequently leads to bitter disagreements and even lawsuits between family members at a time when concerns over money or assets should be avoided.

Most states permit individuals to refer to a personal property list in their will and then itemize in a separate document a suggested list of what items of personal property they wish to go to particular persons. In this way the executor may distribute personal items, such as wedding rings, antiques, photo albums and dishes, to the persons the decedent most wishes to have them. Including sentimental objects on the personal property list eliminates any controversy about the testator's wishes. …

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