Keeping wealth in the family

Make sure the wealth you've earned goes to those you love.

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By Walecia Konrad, Money Magazine contributing writer

the_browns_2.jpg
The Browns want to make sure the money they've saved will be there for their children.
Understanding the rules
Unless Congress acts, there will be no federal tax on estates at all in 2010, and the exemption - the part of the estate to which the tax doesn't apply - and rate will reset to 2001 levels in 2011.
Year Tax-free up to Tax rate beyond
2008 $2 million 45%
2009 $3.5 million 45%
2010 Unlimited ---
2011 and beyond $1 million 55%
Estate planning 101
  • Six things every family needs
A will
to say who gets what and name guardians for kids.
A health-care proxy
which empowers a person to make medical decisions for you if you're incapacitated.
A living will
which states your wishes regarding extreme medical treatment.
A durable power of attorney
which names a person who can make financial decisions for you if you are unable to.
Life insurance
to replace some income if one of the family's earners dies.
Disability insurance
to replace income if one of the family's earners is hurt or ill and unable to work.
CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.38%
1 yr CD 0.70%
5 yr CD 1.51%

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Rates provided by Bankrate.com.

New York (Money) -- Lisa and Bruce Brown are fortunate enough to have plenty of assets to protect. Foremost of these is their children: The Browns are the proud parents of four-year-old Emma, and they have another baby on the way.

The Oakland couple also have considerable assets of the financial variety. Thanks to diligent saving and smart property investments, the Browns have a net worth of nearly $2 million.

Ages 43 and 42, respectively, Lisa and Bruce are undoubtedly in the prime of their lives. And God willing, they'll each live another 60 years. But just in case, "we want to make sure our children are protected and our assets stay safe for them," says Lisa.

To that end, they've wisely begun putting an estate plan into place: They've written wills, named guardians for their kids, even set up a living trust to keep more of their estate out of court.

The only thing they haven't addressed is taxes. The laws are so confusing, Lisa isn't sure if their estate would be subject to them. "It seems like Washington changes the rules every year," she says.

Well, almost. In 2009 the federal exemption - the amount of an estate not subject to a 45% federal tax - has increased from $2 million to $3.5 million for individuals. This move is the result of a 2001 law that continually increased the limit for the eight years following. Oddly, the law calls for estate tax to be eliminated in 2010, then to revert back to 2001 levels ($1 million with a 55% tax rate above that) in 2011.

The seesawing exemption is a good reason to review your estate plan. You want to be sure your legacy is handled the way you want it to be, no matter what happens in Washington.

Estate strategies could fill volumes of this magazine, but the following are some of the basics to consider. An estate attorney (find one at the American Academy of Estate Planning Attorneys' site, Aaepa.com) can tailor a plan to your situation and address your state rules.

Cover the basics

There are some essentials every estate plan should include; if yours doesn't, hop to it. The first is - duh - a will. Even if you don't have many assets to pass on, this is the best way to name guardians for your kids.

And have you assigned a health-care proxy and written a living will? The former makes it clear who can make medical decisions for you if you're incapacitated; the latter states how much intervention you want.

Make sure you've signed a durable power of attorney, which names a person to manage your finances if you are unable to. And verify that you have adequate life and disability insurance with the calculators at lifehappens.org.

Calculate your estate

Add up the value of your assets - including life insurance benefits - and subtract your liabilities. The total will affect your choices.

See the box at right to get a sense of how your estate would be affected by coming exemptions.

Congress will probably intervene to avoid a year without estate taxes, says Lawrence Chane, an estate-planning attorney with Blank Rome LLP in Philadelphia. Lawmakers, he adds, are expected to keep the current exemption.

"Of course, anything can happen," says Chane, "but for now, plan around the higher limit." That's $3.5 million - but as you'll see, with the right strategy, a married couple can shelter double that.

Stay out of court

Depending on where you live, you may want to establish a living trust, as the Browns did, to help your heirs avoid the hassle and expense of probate, the legal process of having a will declared valid.

"It's not unusual for a $1 million California estate to generate $23,000 in probate fees," says Liza Weiman Hanks, a San Jose estate attorney and author of "The Busy Family's Guide to Estate Planning." (Note: If you're in one of the 20-some states with the uniform probate code - to check, go to estate.findlaw.com/probate and click on Probate Court & Laws, then State Laws - a standard will is enough, says Hanks.)

A living trust puts all your assets under one umbrella. You can use money while alive and change the trust without penalty. When you die, your estate goes directly to the beneficiaries. Be sure to add a "pour over" will, which allows assets accumulated after the trust was made (or that you forgot to address) to be included in it at the time of your death.

Avoid taxes

You can pass any size estate to a spouse tax-free; it's when other beneficiaries are involved (and they will be eventually) that Uncle Sam wants a share. If your estate could be subject to tax, you'll want additional trusts to reduce or eliminate the hit.

If your estate is more than $3.5 million: Would a large life insurance benefit tip your estate over the limit? If so, consider an irrevocable life insurance trust. This ensures that death benefits are excluded from your estate, therefore not taxable. Irrevocable means what it says, though. You can't change the terms after it's set up.

If that won't protect your estate completely, consider bypass trusts, which double the exemption. A husband and wife can each put $3.5 million (for a total of $7 million) into such trusts for their beneficiaries.

When, say, the husband dies, the wife could use income from his trust and draw a tiny amount of the principal. The rest goes to the trust's beneficiaries when she dies, tax-free. Without a bypass, the entire estate might have simply passed to the wife, and when she died, anything above $3.5 million would be taxed because only her exemption would apply.

If your estate could get to $3.5 million: A disclaimer bypass trust is a good option; it allows you to put some of the estate into a bypass trust at the time of your spouse's death. The Browns might consider this, says Chane. If their estate stays under the exemption limits, the survivor isn't committed to a bypass trust. "Since they don't know how much they'll have or what tax law will be, a disclaimer can give them flexibility," he says.  To top of page

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