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Ten Ways to Create an Effective Estate Plan

This week a client of mine passed away from pancreatic cancer. I had known him for six years. He was a Buddhist, ran 100 miles a week, never had a bad word to say about anyone, raised 3 lovely children and yet, with only a month's warning, his stay on Earth was over. As has happened more times than I can count, he called me from the hospital to come over to prepare an estate plan so that his wishes could be carried out upon his death. Luckily, I was able to prepare a will and trust within a few days and get the deeds to his real property recorded just a day ahead of his permanent departure. Instead of spending the time with his teenage children and his sister and brother-in-law, he was having to answer questions I was asking of him and review a bunch of documents that must have been swimming before his heavily sedated eyes. Although when we completed his divorce in 2006 we discussed that he really needed an estate plan, he, as most of us would do, put it off for another day, which, tragically, came sooner than he would ever have imagined. None of us want to leave this Earth without setting our affairs in order and providing appropriately for our heirs and beneficiaries. Yet, many of us leave it to those who survive us to deal with the complexities and confusion of a probate estate while, at the same time, those survivors must try to deal with their own grief over the loss of a loved one. I know this topic is not pretty. It is a depressing subject in depressing times. I speak of this out of love and concern that what happened to my friend and client, or, what's worse, what happens when someone does nothing at all before succumbing to an untimely death, might happen to you.

Please take a minute to review the ten points that I make below and consider what is right for you and your family to do at this point in time.

1. Consider using a will to transfer property to your children instead of owing property jointly.

Unlike a will, a transfer of a property interest is irrevocable, which may prevent someone like yourself from altering the disposition of your estate if circumstances were to change before your death. Also, holding title to your personal residence jointly with a child or children can result in partial loss of the capital gain exclusion if it is sold before your death. A solution to this problem is to use your will to make any property transfers, which would occur only when you die.

2. Think before gifting property to your children.

Parents often have regretted having made outright gifts to their child of that child later obtained a divorce and ex-son- or daughter-in-law is awarded an interest in the gifted property by a court, or when the property is taken pursuant to a legal judgment against the child. Sometimes the child makes an unfortunate business decision, or has a gambling problem, which can also contribute to the dissipation of the gifted asset prematurely. Such problems can be minimized through the proper use of a trust or a business entity, such as an LLC.

3. Ensure your assets pass in accordance with your wishes upon your death.

Many types of assets can pass to your heirs or other people you love or charities you support based upon the type of beneficiary designation that you make on such assets as life insurance, IRAs. brokerage accounts, pay on death (POD) accounts and the like. The provisions of your will cannot change a beneficiary designation. Remember to account for things in your will that you have already designated and consider amending your beneficiary designations upon review of your will or when formulating your estate plan.

4. Understand your estate's true value for federal estate tax purposes.

Many people do not understand that life insurance proceeds become a part of their taxable estate at their death, if they own the policy. This common occurrence most likely will increase their total estate value to more than the amount sheltered from estate tax by the estate tax exemption, which, in 2009, is $3.5 million. Sometimes it is better if the life insurance policy is owned by the trust or the trust is named the alternate beneficiary after a spouse.

5. Consider state death taxes in light of recent law changes.

Many states have "decoupled" their death tax from the federal estate tax, which means your estate could be subject to death tax in your state, even if no federal estate tax is due. This could result in an unpleasant surprise upon your death, one that might be avoidable with proper planning. Legislation is working its way through state and federal legislatures right now creating new ways to tax us and estate taxes are clearly going to go up. The laws of each state where you own property should be carefully reviewed to determine the potential exposure to state death taxes and how to minimize them.

6. Know the difference between the amount you can transfer gift tax-free during your lifetime and the amount that can pass free from estate tax upon death.

The maximum amount in 2009 that can be given away during a lifetime without incurring gift tax is $3.5 million. On the other hand, the amount sheltered at death is currently $2 million, scheduled to increase to $3.5 million. Currently the law establishing the estate tax is scheduled to be repealed in 2010. However, the laws pertaining to gift tax are not similarly scheduled to be repealed. Without further legislation, the estate tax will be reinstated at levels in effect prior to passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. You can make yearly gifts up to the annual exclusion amount which is currently $13,000 per person. These gifts do not count against your $1 million gift tax exemption.

7. Maximize income tax basis "step-up" benefits at death.

Low-basis/high-value assets should generally not be given away during your lifetime, since the basis for capital gain computation purposes will be increased to fair market value at death. If the asset is given away, the basis remains at the property's original cost.

8. Indicate your desired funeral arrangements.

A pre-arranged funeral or directions for cremation can greatly relieve family members from additional stress and worry upon your death. Taking a few moments to think about how you want people to observe your passing may not be a pleasant task, but a wonderful gift that you can give to your loved ones and well worth the angst it might cause you.

9. Plan for potential disability.

In the absence of adequate medical care directives, powers of attorney, or trusteeship of assets, costly and time-consuming court proceedings may be required in order to appoint a guardian or conservator to act on your behalf if you become disabled. This is such a simple part of an estate plan and, again, such a tremendous gift to your family and close friends not to cause them to have to make impossible decisions for you when you are no longer able to do so.

10. Review and update your estate plan on a regular basis.

Changes in the law and in your personal financial and family situation over time make it essential that you periodically review and update your estate plan so that it still reflects and will carry out your wishes. Such obvious changes might be marriage, divorce, death of a spouse, birth of a child or grandchild, purchase and/or sale of real or personal property with a fair market value of over $50,000, a move out of state or country, a change in retirement benefits, purchase of life insurance policies, retirement, change or loss of employment, formation of partnerships and/or corporations and the like. However, just the passage of time, usually five to seven years, suggests a review of the estate plan and of any such changes that have occurred in the lives of all of the people that you have designated to be your agent, trustee, executor, conservator and/or guardian.

Estate planning is not something to be put off. As soon as you are old enough to be self-supporting, acquire property, incur debt, have a spouse or domestic partner, care for a child and/or desire to be socially responsible, is the time to begin planning ways of maximizing your estate for your own future as well as the future of your heirs and other beneficiaries. It is everyone's obligation to their families, friends and society to do whatever they can to reach their financial goals. Be sure to consult with your tax, legal, and financial professionals, early and often.