Family Wealth A Short Course in Estate Planning A well-drawn estate plan can keep your wealth in the family long after you are gone.
By ERIC SCHURENBERG

(MONEY Magazine) – Of all the possible threats to your family's wealth, from inflation to bear markets to natural disasters, only one is certain to occur: your death. So while estate planning may not be the most pleasant of topics, it is one defense you can be sure your family will need. If you die without a will, in most states you partially disinherit your spouse and condemn your estate to an unnecessarily prolonged and expensive wait in probate. Similarly, if you fail to prepare for estate taxes, your legacy could be clipped by federal transfer taxes at rates as high as 55%. With proper planning, most estates could reach their intended heirs without losing a penny to federal taxes. A good estate plan has two aims: to make sure your wealth reaches your intended heirs in the manner you choose, and to minimize your estate's erosion by federal and state taxes. To accomplish both, you must manipulate the forbidding tangle of ancient common-law traditions and modern tax regulations that govern estate transfers. Don't attempt it without the help of a practiced estate attorney; going it alone, you risk having the orderly transfer of your wealth disintegrate into an ugly court battle among your heirs. Even with a lawyer, though, your chances of smoothly passing on your wealth improve the more you understand the process. By grasping the fundamentals discussed in ( this article -- wills, trusts, joint ownership, lifetime gifts, the marital deduction and the $600,000 exemption -- you will at least understand the obstacles and what your plan must do to succeed.

YOUR WILL You need a will whether you are single or married, old or young, healthy or ill. This document not only instructs your survivors about how to distribute your property but also enables you to nominate a guardian to care for your children if they become orphaned. Another crucial function is to designate someone as your estate's executor, the person who will be responsible for taking inventory of all your property, paying your estate's creditors and taxes and ultimately splitting your estate among your heirs. If you die without a will -- intestate, in legal jargon -- the courts take control of your estate and, in effect, write a will for you in accordance with your state's intestacy laws. It is unlikely that the result will match your wishes. For example, in most states your mate does not automatically inherit all your property if you have children. New York's intestacy law would award your spouse $4,000 plus one-third of the balance of the estate. The rest would be evenly divided among your children, regardless of their ages or special needs. In the absence of a will, the court must also appoint an administrator for your estate and a guardian for your children. Normally the courts prefer a relative as administrator, but if one is not available or willing to serve, your estate could end up in the hands of a professional administrator. This official generally takes 3% to 5% of your estate in fees a year, an arrangement that gives him little incentive to settle your estate quickly or to minimize your estate for tax purposes. The court would also select a relative as guardian if the children were orphaned, but there is no guarantee it would choose the one you prefer. And since the court's appointment does not carry the moral weight of your last wishes in your will, your children could become the object of a bitter custody battle. Considering the anguish it prevents, a will is a bargain. If your estate is simple -- less than $600,000 with no out-of-state real estate -- you can expect to pay between $50 and $200 for a will. You could draft one even more cheaply on your own by using a do-it-yourself form. But the savings are hardly worth the risk that your homemade testament could founder on a technicality.

PROBATE Whether you write a will or not, your worldly effects will generally be subject to the ponderous process known as probate. At this time your executor (or the court-appointed administrator) values your assets, pays off your creditors, files the estate's taxes and finally awards what's left to your heirs. Probate occurs under the supervision of a local court known in various states as probate, surrogate or orphan's court. In addition to approving your will -- or writing one for you if you failed to -- the probate court rules on the legitimacy of any creditors' claims against your estate and supervises the actions of your executor until your affairs are completely settled. If your minor children inherit any property directly, the court also oversees the guardian's use of that property until the children reach legal adulthood. All guardians -- even the children's surviving parent -- must keep records of their routine use of the children's inheritances and must petition the court for any unusual expenditures on the children's behalf. To spare your offspring this red tape, don't leave property directly to the kids. Instead, bequeath it to a trust established in their benefit and name their guardian as trustee. Other than that, the major drawback to probate is that even with a fairly efficient court and executor, the process takes a minimum of four to eight months. If disgruntled relatives contest the will or if you owned property in another state, your heirs might have to wait years. Administrative and legal expenses during probate normally run between 5% and 10% of the estate, and naturally, the longer your estate lingers in probate, the more these costs grow. A properly drafted will holds probate delays and expenses to a minimum. In most cases, you should give your executor broad powers to settle disputes or sell property as he or she sees fit without having to ask the court for permission. Your will should also avoid provisions likely to be invalidated by the probate court or to spark a challenge from disappointed heirs. In most states, for example, you cannot leave your spouse less than the portion he or she would receive under intestacy laws. Disinheriting a child, on the other hand, is permissible everywhere but Louisiana. If total disinheritance is your aim, however, be sure to specify in your will that you know you are doing it. Otherwise, the child might claim to have been overlooked by mistake. Be careful about bequests, no matter how well intentioned, that could appear as favoritism or slights. For example, don't cut off the daughter who married the millionaire without explaining that her struggling siblings need your legacy more than she does. Her hurt feelings could spur a contest over the will or at least cause a lasting rift in your family. Warns Phoenix estate lawyer John F. Goodson: ''Most people underestimate the psychological impact their final words can have.'' You can also avoid probate problems by keeping your will up to date. You need to have it reviewed whenever your circumstances change significantly -- if, for example, you divorce or move to another state. In any event, have a lawyer look over your will every five years. In addition, keep your affairs in order. Maintain an inventory of all your assets and make sure your executor knows where that inventory is. Your estate should have enough cash on hand to meet your cash bequests and to pay off your estate's creditors, including the state and federal tax collectors. If your wealth consists largely of illiquid assets such as real estate or stock in a family business, you can provide liquidity by purchasing additional life insurance. You might, for example, have your business purchase insurance on your life in an amount roughly equal to the value of your stock in the company. When you die, the firm could use the proceeds to buy back the shares from your estate. Otherwise, your executor might have to unload the stock at fire-sale prices to raise cash. The surest way to avoid probate is to keep your property beyond the probate court's jurisdiction. In fact, a surprisingly large amount of your estate is likely to pass outside probate without any effort on your part. For example, the proceeds of a life insurance policy and the balances in your employee retirement plan, Individual Retirement Account or Keogh account will pass directly to your beneficiaries. Any property you own jointly with rights of survivorship will pass automatically to the co-owner at your death. If you live in one of the eight community property states, half of any possessions that you acquired during your marriage (except gifts or inheritances) belongs to your spouse; the other half passes under your will. If you live in one of the more numerous common-law states, holding some -- but not all -- assets jointly with your spouse is smart estate planning. ''I nearly always recommend that clients put at least the home and a checking account in joint title,'' says Kinnaird Howland, a Providence estate attorney. ''That way the surviving spouse at least owns the roof over his or her head and can get some cash immediately after the other spouse dies.'' Owning everything jointly with your spouse, however, is no substitute for a will. If the two of you were to perish at the same time, your children's inheritance would be left to the rough justice of your state's intestacy laws. The most practical mechanism for skipping probate altogether is probably the so-called revocable living trust or inter vivos trust. A revocable living trust is one that you set up while you are alive, in which you have the power to change or revoke the terms of the trust. (A trust that you establish in your will, called a testamentary trust, does not keep you out of probate.) You may designate yourself as trustee of a revocable living trust, you may prefer to have a bank or trust company as co-trustee if you want professional management for your assets. (For more on the relative advantages of wills and revocable living trusts, see ''Planning a Hassle-Free Legacy'' on page 82.)

TAXES AND TRUSTS Keeping your estate out of probate, for all its advantages, does not protect your wealth against taxation. Probate concerns itself only with property that you own in your own name when you die. By contrast, the federal transfer tax, known as the Unified Gift and Estate Tax, potentially counts as fair game every piece of property that you transfer to someone else, regardless of whether you give it while you are alive or have it transferred on your death. Your taxable estate at your death includes not only the property you own in your own name but also half your jointly held property; the face value of any life insurance you own, regardless of the beneficiary; and any property you don't directly own but over which you have general power of appointment, that is, the right to take it yourself or give it away. (This includes all the principal held in a revocable living trust.) Along with this all-encompassing tax base goes a particularly voracious bite: this year the maximum estate tax is 55% on taxable estates of more than $2.5 million. Fortunately, the estate-tax law leaves enough escape routes so that you can avoid federal estate and gift taxes altogether, provided you plan ahead. To begin with, your estate can deduct all its administrative costs, the value of any debts you leave behind and anything you bequeath to charity. But the most valuable deduction by far is the so-called marital deduction, which lets you leave any amount of property to a spouse tax-free. The trouble is, if you leave everything to your spouse, some of your wealth will end up in the tax man's hands when your spouse dies and your property passes to your children. ''The real challenge of estate-tax planning,'' says Vincent Vaccaro, a tax partner at the accounting firm Coopers & Lybrand, ''is to minimize the tax liability on that second estate.'' To do that, you can make use of a second crucial sheltering provision of the estate-tax law: a credit that allows you to give away during your life or leave at your death a total of $600,000 free of federal gift or estate taxes. Moreover, you can also give away as much as $10,000 per person per year -- $20,000 if you are married -- without using up any of the $600,000 exemption. As long as you give away less than those amounts, your executor will be able to apply the full $600,000 exemption against your estate taxes. Together, the $600,000 exemption and the marital deduction enable parents to pass an estate of up to $1.2 million to their children without federal estate tax. Here's how it's done: say a husband has assets of $1.2 million. In his will he bequeaths half the property to a testamentary trust called a bypass, or family, trust. He directs that the income from the trust go to his wife for the rest of her life and that the principal pass to their children at her death. The husband's estate owes no tax on this bequest, thanks to the $600,000 exemption. And, because the wife does not control the property in the trust, the tax code excludes it from her estate as well. The husband leaves the remaining $600,000 to his wife. This property escapes taxation at his death because of the marital deduction. Though the assets are now in the wife's estate, she can use her $600,000 exemption to bequeath them tax-free to the children. Tax-skirting trusts allow some variation on this basic ploy. Suppose, for example, that the husband does not want to leave property directly to his wife, perhaps because she is infirm. He can instead put the money in a so- called marital trust with, say, an adult child as trustee and his wife as sole beneficiary with general power of appointment. The contents of the trust would be considered part of the wife's taxable estate; so even though the husband has not left the property to her directly, his bequest still qualifies for the marital deduction. Giving the wife general power of appointment allows her to leave the trust | property to whomever she chooses -- including a new husband. Thus the first husband has no guarantee under this arrangement that the property he leaves in the marital trust will ever reach his children. To allay that concern, he could leave the property in a so-called qualified terminable interest property, or QTIP, trust. In this arrangement, the trust agreement, not the spouse, controls who gets the property at the spouse's death. Such a trust would still qualify for the marital deduction if it meets two requirements: all the trust's income must go to the wife during her lifetime and be paid at least annually, and the principal must be considered part of her estate. To avoid taxes on an estate larger than $1.2 million, you first need to reduce the estate by charitable bequests or, better yet, by giving away assets while you are alive. If you leave property to a charity in your will, you get a deduction against your estate taxes. But if you donate property to a charity while you are alive, you not only reduce your eventual estate but also get a deduction on your income taxes. You need not make all your gifts to charity, of course. You can also give property to your family. As long as you and your spouse keep the gifts below $20,000 annually per heir, you don't use up any of your $600,000 exemption. The best assets to give away are those you expect to appreciate rapidly. Suppose you intend to bequeath your $300,000 portfolio of stocks, currently appreciating 15% a year, in trust to your grandchildren. If you give the stocks away now, you will still have roughly half of your $600,000 exemption to apply against your estate taxes. But if you keep the stocks and live another five years, your portfolio will have grown to more than $600,000. Leaving that amount to the grandchildren will absorb your estate's entire exemption. You can get an asset out of your estate without making an outright gift by transferring ownership to an irrevocable living trust. In this arrangement, you give up any right to trust income and principal as well as the power to change the trust agreement. Because you have, in effect, renounced the benefits of owning the property, it is not considered part of your taxable estate. When you draw up the trust, however, you are free to give the income to any beneficiary and to specify who inherits the principal. Note, though, that property transfers to an irrevocable living trust are considered gifts to the trust. So you may owe gift taxes if you put in more than $10,000 a year. ( Obviously, the realm of QTIPs and irrevocable living trusts is no place for a layman -- or even a lawyer who is not skilled in estate planning. Generally, your best source of names for estate attorneys is your accountant or financial planner. They deal with such lawyers regularly and ought to know which ones are best in your area. (In fact, it makes sense to coordinate all your estate planning with your accountant and financial planner, since they are the experts most intimately familiar with your finances.) In selecting your attorney, interview at least three, telling them as much about your estate as you can. While you may lack the expertise to judge the legal merits of their proposals, you can gauge how well they listen and judge how comfortable you feel discussing personal family and financial matters with them. Avoid lawyers who seem inclined to dictate an estate plan, rather than hearing you out. Says New York estate attorney Robert Brosterman, co-author of The Complete Estate Planning Guide (Mentor, $4.95): ''A good attorney will tell you what you may do and the best way to do it. But it is for you to decide what you really want for your family after you're gone.''