What you need to know about estate planning, including why
you may need a will and assigning a power of attorney.
1. No matter your net
worth, it's important to have a basic estate plan in place. Such a plan
ensures that your family and financial goals are met after you die.
2. An estate plan has
several elements. They include: a will; assignment of power of
attorney; and aliving 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.
3. 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?
4. 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 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.
5. 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.
6. 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.
7. The federal estate
tax exemption -- the amount you may leave to heirs free of federal tax -- is
now set permanently at $5 million indexed for inflation. In 2013, estates
under $5.25 million are exempt from the tax. Amounts above that are taxed up to
a top rate of 40%.
8. 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.
9. There are two easy
ways to give gifts tax-free and reduce your estate. You may give up to
$14,000 a year to an individual (or $28,000 if you're married and giving the
gift with your spouse). You may also pay an unlimited amount of medical and
education bills for someone if you pay the expenses directly to the
institutions where they were incurred.
10. There are ways to
give charitable gifts that keep on giving. If you donate to a charitable
gift fund or community foundation, your investment grows tax-free and you can
select the charities to which contributions are given both before and after you
die.
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