Why is estate planning so important? Estate planning ensures that all of your family and financial goals are met after you die. An estate plan has several elements. They include: a will; assignment of power of attorney; and a living will or health-care proxy (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates. Taking inventory of your assets is a good place to start. Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you're ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself? Everybody needs a will. A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will -- also known as dying "intestate" -- can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die. Trusts aren't just for the wealthy. Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits. Discussing your estate plans with your heirs may prevent disputes or confusion. Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you're gone. The federal estate tax exemption -- the amount you may leave to heirs free of federal tax -- changes regularly. The estate tax hit $3.5 million in 2009, but was phased out completely in 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 at $1 million. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic. By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death. Why would I need a will? If you don't have one, a court decides who gets your assets. A will is a device that lets you tell the world whom you want to get your assets. Die without one, and the state decides who gets what, without regard to your wishes or your heirs' needs. So-called intestacy laws vary considerably from state to state. In general, though, if you die and leave a spouse and kids, your assets will be split between your surviving mate and children. If you're single with no children, then the state is likely to decide who among your blood relatives will inherit your estate. Making a will is especially important for people with young children. Wills are the best way to transfer guardianship of minors. You may amend your will at any time. In fact, it's a good idea to review it periodically and especially when your marital status changes. At the same time, review your beneficiary designations for your 401(k), IRA, pension and life insurance policy since those accounts will be transferred automatically to your named beneficiaries when you die. A will is also useful if you have a trust. A trust is a legal mechanism that lets you put conditions on how your assets are distributed after you die and it often lets you minimize gift and estate taxes. But you still need a will since most trusts deal only with specific assets such as life insurance or a piece of property, but not the sum total of your holdings. Even if you have what's known as a revocable living trust in which you can put the bulk of your assets, you still need what's known as a pour-over will. In addition to letting you name a guardian for your children, a pour-over will ensures that all the assets you intended to put into the trust are put there even if you fail to retitle some of them before your death. Any assets that are not retitled in the name of the trust are considered subject to probate. As a result, if you haven't specified in a will who should get those assets, a court may decide to distribute them to heirs whom you may not have chosen. What are Living Wills and Health-Care Proxies? Making your medical wishes known now can save a lot of heartache later. A living will (also known as an advance medical directive) is a statement of your wishes for the kind of life-sustaining medical intervention you want, or don't want, in the event that you become terminally ill and unable to communicate. Most states have living will statutes that define when a living will goes into effect (for example, when a person has less than six months to live). State law may also restrict the medical interventions to which such directives apply. Your condition and the terms of your directive also will be subject to interpretation. Different institutions and doctors may come to different conclusions. As a result, in some instances a living will may not be followed. Nevertheless, a patient's wishes are taken very seriously, and an advance medical directive is one of the best ways to have a say in your medical care when you can't express yourself otherwise. You increase your chances of enforcing your directive when you have a health care agent advocating on your behalf. You can name such an agent by way of a health-care proxy, or by assigning what's called a medical power of attorney. You sign a legal document in which you name someone you trust to make medical decisions on your behalf in the event that you can't do so for yourself. A health care proxy applies to all instances when you're incapacitated, not just if you're terminally ill. Choose your health-care agent carefully. That person should be able to do three key things: understand important medical information regarding your treatment, handle the stress of making tough decisions, and keep your best interests and wishes in mind when making those decisions. Why would I ever assign a power of attorney? When you can't control your financial life, make sure someone you trust will. No one is immune from aging or the loss of mental clarity that may come with it. And you're never immune to health crises that may leave you unable to handle the business of your life: paying bills, managing investments or making key financial decisions. Granting someone you trust the power of attorney allows that person -- known as your "agent" or "attorney in fact" -- to manage your financial affairs if you are unable to do so. Your agent is empowered to sign your name and is obligated to be your fiduciary -- meaning they must act in your best financial interest at all times and in accordance with your wishes. There are different kinds of powers of attorney, but in estate planning there are two essential types you should know. The first is the "springing power of attorney," which only goes into effect under circumstances that you specify, the most typical being when you become incapacitated. Often that means your agent cannot act until he or she provides doctors' letters and sometimes court orders to prove you are incapable of making decisions for yourself. There is also the "durable power of attorney." It is effective immediately, and your agent does not need to prove your incapacity in order to sign your name. An attorney can help you decide which form makes the best sense for your circumstance. In any case, take care in choosing your agent. That person should be competent, trustworthy, willing to take on the burden of your affairs and financially secure. If you choose a relative or friend as your agent, you probably won't have to pay them. But if you name a bank, lawyer or other outside party, you will have to negotiate compensation, which can range from hourly fees to a percentage of your assets paid annually. If you do become incapacitated without having assigned power of attorney, the court will step in to appoint a guardian. This process might cost your family well over $1,000, not including the cost of the guardian's annual visits to court to report on your situation. Plus, the person chosen may not be someone you would have picked. When would someone consider setting up a trust? Trusts aren't just for Rockefellers. The notion of a legal trust may conjure up images of country clubbers cradling gin-and-tonics. The truth is a trust may be a useful estate planning tool for your family if you have a net worth of at least $100,000, or a sizable amount of your assets is in real estate, a business or even an art collection. You may want to leave your estate to your heirs in a way that is not directly and immediately payable to them upon your death. For example, you may want to stipulate that they receive their inheritance in three parts, or upon certain conditions being met, such as graduating from college. You want to support your surviving spouse, but also want to ensure that the principal or remainder of your estate goes to your chosen heirs (e.g., your children from a first marriage) after your spouse dies. You and your spouse want to maximize your estate-tax exemptions. You have a disabled relative whom you would like to provide for without disqualifying him or her from Medicaid or other government assistance. Among the chief advantages of trusts, they let you: Put conditions on how and when your assets are distributed after you die; Reduce estate and gift taxes; Distribute assets to heirs efficiently without the cost, delay and publicity of probate court. Probate can cost between 5% to 7% of your estate; Better protect your assets from creditors and lawsuits; Name a successor trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so. Trusts need to be set up by an experienced estate planning attorney. Trusts are flexible, varied and complex. Each type has advantages and disadvantages, which you should discuss thoroughly with your estate-planning attorney before setting one up. When it comes to cost, a basic trust plan may run anywhere from $1,600 to $3,000, or possibly more depending on the complexity of the trust. Such a plan should include the trust setup, a will, a living will and a health-care proxy. You will also pay fees to amend the trust if it's revocable and to administer the trust after you die. One caveat: Assets you want protected by the trust must be retitled in the name of the trust. Anything that is not so titled when you die will have to be probated and may not go to the heir you intended but to one the probate court chooses. For a trust in which you want to put the majority of your assets -- known as a revocable living trust -- you also have to have a "pour-over will" to cover any of your holdings that might be outside of your trust if you die unexpectedly. A pour-over will essentially directs that any assets outside of the trust at the time of your death be put into it so they can go to the heirs you choose.
