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While no two situations are alike, a look at some of the more common estate planning issues that typically apply at certain stages of life may help you evaluate the adequacy of your preparations.
Drawing up a will is critical to ensuring that your final wishes will be known. If you are a parent of minor children, you should name a suitable guardian. You may also want to consider owning a life insurance policy that would help your family pay for funeral expenses, legal fees, medical bills and any outstanding debt you may have left behind. If you have inherited assets or are a business owner, creating a more encompassing estate plan as a young adult may be important as well.
Increasing home equity and assets held in investment and retirement savings accounts are often the focus during these years. You will want to take steps to maintain control of your assets. This may involve naming a durable power of attorney (someone who would make financial decisions on your behalf if you became incapacitated) and a medical power of attorney to make health care decisions for you if you were unable to do so. You may also wish to form a revocable or irrevocable trust to better protect your assets.
Although trusts can serve many purposes, they are most commonly used to:
Once you near retirement, your focus is likely to be on minimizing taxes and preserving assets for your future use, as well as the needs of your heirs. Current federal law allows you to transfer up to $2 million to designated beneficiaries at the time of your death without owing federal estate taxes. That exemption is scheduled to increase to $3.5 million in 2009 before the tax is repealed for the year 2010. But the estate tax is due to reappear in 2011 with an exemption of $1 million unless permanent repeal or higher exemptions are enacted before then.
There are several ways to reduce the value of an estate and/or transfer assets to future generations in a tax-efficient manner, including annual tax-free gifts of up to $12,000 to any number of recipients. Some types of trusts funded with life insurance also offer current tax benefits and can be arranged to reduce or eliminate taxes for beneficiaries. In addition, if you have assets in an IRA that you don’t expect to need during your lifetime, you can take advantage of IRS rules that allow you to name a younger beneficiary, who can then stretch out the inherited IRA’s tax deferred growth potential over his or her lifetime. Another possible strategy is to donate assets to a charity, potentially generating tax benefits.
Income and estate taxes can also be reduced by putting assets into a properly drafted and executed irrevocable trust. Income taxes due on trust assets are paid by the trust rather than you, and assets placed in the trust are removed from your estate. However, “irrevocable” means that generally you cannot change beneficiaries or trustees once they are chosen, and you relinquish control of the assets once they are transferred to the trust.
One aspect of estate planning that never changes is the need for updating beneficiaries due to marriage or other life-changing events. To avoid unintended consequences, be sure to periodically review the beneficiaries of your will, as well as investment vehicles that are not governed by your will. These include IRAs and retirement plans, investment accounts and life insurance policies. Outdated beneficiary designations could misdirect the intended flow of your entire estate plan.
Finally, because estate planning often entails many facets of your financial affairs, you may need to talk with qualified legal, tax, insurance professionals to help you determine your best course of action. Your financial advisor can help you identify where to start and find qualified professionals that have your complete financial and estate needs in mind.
This article is not intended to provide specific investment advice for any individual.Consult me, your financial advisor, with questions.
LPL representatives offer access to trust services through The Private Trust Company N.A., an affiliate of LPL.