The goal of estate planning is first, to take control of your estate while you have the mental capacity to do so and designate a person to act on your behalf when you are not able to manage your affairs. Second, you want to be able to pass your assets to anyone you want and in any manner you want. Finally, you want to pay the absolute minimum amount of estate taxes, court costs and attorneys fees possible.

 

 

If you own your home when you pass away, probate will be required unless you have established a living trust. Probate is a legal process which include: file with the probate court, inventory property, appraise property, pay legal debts and distribute what is left as the will directs. Probate is a lengthy process, it can also be costly. The court and usually attorneys are involved so it requires court costs and attorney fees.

 

 

Living trust is an estate planning mechanism usually established in order to avoid probate and also save federal estate tax. The current tax law allows a personal exemption of $2 million in 2008. That means if your taxable estate is under $2 million, no estate tax will be assessed. However, if your estate exceeds this amount, estate tax will be assessed at a hefty rate of 45%. These tax dollars could have been avoided and pass onto your loved ones if there were careful estate planning.

A carefully drafted living trust allows couples to pass up to $2 million assets to their family without paying any estate taxes. This amount can be up to $7 million by the year 2009.

 

 

Single persons can make use of a living trust to benefit a friend or significant other and pass the estate to the final beneficiary when the significant other or friend passes away. In this way, the estate will not be taxed until the final beneficiary receives the trust property. The friend or significant other can have access to the trust property and use it for health, maintenance, education and support during their lifetime.

 

 

estate planing is incomplete without establishing a health care directive and durable power of attorney. A health care directive expresses your wishes and makes it known that under certain circumstances your dying shall not be artificially prolonged by using life-sustaining treatment. Without such directive, doctors will decide when to disconnect such life sustaining treatments irrespective of the patient’s best wishes. Long term use of life sustaining systems can consume hundreds of thousands of insurance dollars and family will be liable to pay the balance of the medical bills.

 

 

A durable power of attorney allows you to designate someone to manage your business and financial affairs. The power of attorney shall become effective upon your temporary or permanent disability or incapacity. The principal can resume and manage his or her affairs after the physician declares that s/he has regained the mental capacity to do so. Without a power of attorney, no one can take care of business or financial matters for you. This can be important such as being able to continue to make mortgage payments or to pay credit card debts to prevent interests from adding up. Some people who are at old age or poor health may want to have the durable power of attorney effective immediately after execution of the document. The power of attorney may be revoked in writing. It will also terminate upon the principal’s death.

 

Some people use a form of will substitute called community property agreement. A community property agreement allows property to be passed onto the surviving spouse without going through probate. No estate taxes will be due because one may pass an unlimited amount of property to the surviving spouse under the tax law. However, a will is necessary to determine heirs on the second death, and to name guardians. There will be probate if the surviving spouse passes away with an estate worth more than $100,000 or owns any piece of real property.

 

 

Community property agreement is not appropriate if you do not want all of the property to go to the surviving spouse (for example, there are children from a previous marriage or you want to keep separate property separate). Community property agreement is also not appropriate if the surviving spouse will end up with more than the amount that is exempt from federal estate taxes.

 

 

Estate taxes must be paid in cash within 9 months of the date of death. Your assets are valued at fair market value at the date of death. If your estate does not have enough cash, the system will require that your best asset be sold to raise money for taxes. Your personal representative may have to mortgage property in order to keep the property and still have enough money to pay taxes.

 

 

You may save estate taxes by gifting. You may gift up to $12,000 per year to as many individuals as you want. This will not use up any of your lifetime exemption from estate taxes. If you gift more than $12,000 to any one person you must file a gift tax return telling the IRS that you used up some of your lifetime exemption. You will not have to pay any gift taxes unless you have already used up your lifetime exemption.

 

 

In the process of estate planning, it is important to understand the concept of stepped-up basis. Congress has given us a huge break on capital gains taxes by allowing heirs to “step-up” the basis of the assets they inherited to the fair market value as of the date of death of the decedent. Consequently, if the heir sells an inherited asset such as a piece of real property, s/he only has to pay capital gains taxes on the increased value of the asset since the decedent’s death. This usually makes a significant difference in the tax basis and thus reduce the amount of capital gains tax owed.

If the decedent gifts the asset to the heir before death, then the heirs are not eligible to receive the stepped-up basis. Therefore, gifting before death can be a major mistake, costing thousands in unnecessary tax dollars. However, if the estate is over 2 million, gifting can still make sense, because the estate tax rate is higher than the capital gains tax rate.