(MONEY Magazine) – FAMILY MATTERS The stories that follow in this section expand on the role of wills and trusts in your estate planning. 110 Trusts That Protect Your Family 117 How to Pay Zero Estate Taxes 126 Writing a First-Rate Will

Whatever your age, you can always find reasons to put off estate planning. There's the hassle of finding a lawyer, the expense, and all that off-putting jargon. Worst of all, perhaps, is the uncomfortable feeling you get from thinking about your own death. None of these excuses, however, justifies the price -- in both money and frustration -- that your survivors will pay if you don't put your affairs in order. If you die without a will, you effectively leave your family's financial security to the ungentle mercy of inflexible state laws, frequently plodding courts and sometimes greedy lawyers. You could also wind up bequeathing far more than necessary to your Uncle Sam. Federal tax brackets start at 37% on estates above $600,000 and top out at a back-bending 55% on multimillion-dollar ones. And the rules may well change -- for the worse. Says Stuart Becker, a tax partner with the accounting firm Laventhol & Horwath in New York City: ''When President Bush says that taxes won't increase, he's talking about income taxes, not estate taxes.'' A carefully drawn estate plan can spare your family both expense and anguish. By using a few relatively straightforward techniques, most families can pass their estates on with a minimum of red tape and without a penny of federal estate tax. At the same time, you can also protect the special needs of youthful, disabled or spendthrift heirs. The stories on estate planning that follow this one will tell you how to accomplish those goals with wills and trusts, the basic building blocks of a solid estate plan. But before reading about them, you need to know the three fundamental issues that every estate plan must address: providing for heirs, minimizing estate taxes and lightening the administrative burden on survivors.

-- Providing for Your Heirs

How property passes to your heirs depends on whether you hold it in your name or through some other form of ownership. Assets that you own jointly with rights of survivorship, for example, will automatically go to the surviving joint owner after your death. Assets for which you designate a beneficiary, such as Individual Retirement Accounts, pensions and life insurance policies, will pass to whomever you name. But there is only one way to make sure that property you own outright reaches your heirs: by leaving it to them in your will. An effective will need not be complicated or expensive. According to the National Resource Center for Consumers of Legal Services, the average cost nationwide for a simple will is only $83. A more elaborate will might cost $150 to $500, depending on the complexity of your finances. Yet an estimated seven of 10 adults have never written a will. Should you die without a will, the assets in your estate will be disbursed according to your state's laws of intestacy. These laws are essentially rigid formulas for dividing property, and they make little or no allowance for a family's special needs. In most states, for example, one-half to two-thirds of what you own would go to your children, regardless of how young or irresponsible they may be or how much your spouse may need. No doubt many people without wills have simply put off thinking about them. But others may assume that their estates are in order without wills because they own everything jointly with their heirs. That could be a costly mistake. Suppose, for example, a widow makes her son the joint owner of her house with the understanding that he will sell the property after her death and divide the proceeds with his sister. In reality, the daughter may get nothing: the son's obligation is merely moral, not legal. If your heirs are minors or financially inept adults, you also need to ) ensure that your property is managed for their benefit. Financially inexperienced widows, for example, are frequent victims of bad advice, well intentioned or otherwise. And though minors' inheritances will be managed by the guardian of their property -- whom you name in your will -- that person will have to seek a probate judge's approval for all but the most routine investment and spending decisions. While the law's laudable intent is to protect your children from a thieving or incompetent guardian, it creates a burden that can work to their detriment. You can solve this problem by bequeathing the kids' inheritances to a trust. Contrary to popular belief, trusts are not just for the charity-ball set; in fact, uncomplicated trusts can cost as little as $300 to $600 to set up, and an experienced estate lawyer can customize them to fit just about any family's needs. Simply put, a trust is a legal device that holds property you place in it for the sake of one or more beneficiaries. The trust is managed by a trustee in accordance with instructions you set forth in the written agreement that creates the trust. Unlike a guardian, a trustee can usually manage your children's money without interference from a court. For example, Jeffrey Mitchell, 31, and his wife Charlene, 29, of Edmonds, Wash. want to assure that their children Lindsey, 2, and Matthew, nine months, can afford to go to college. To make certain that happens even if the children are orphaned, the Mitchells have established testamentary trusts -- ones that take effect upon their deaths according to instructions in their wills. The agreements remain in force until their youngest child reaches age 22 and has presumably finished college. At that time, the children receive equal inheritances.

Minimizing Your Taxes

While income taxes may be one of life's certainties, estate taxes need not be. In fact, you can escape the federal estate tax entirely by making sure that the value of your taxable estate is below $600,000. Federal taxes on estates under that amount are entirely offset by a $192,800 credit, which is available to everyone. That doesn't mean, however, that you can avoid the tax by just giving away everything but $600,000 on your deathbed. The federal estate and gift taxes are unified -- meaning that the value of taxable gifts as of the time you made them will be added to the property you hold at death in calculating your estate-tax liability. (To estimate whether your estate is likely to incur federal tax, fill out the worksheet at left.) Fortunately, the tax law leaves you plenty of loopholes. You can give as much as $10,000 a year each to as many people as you wish without triggering the gift tax; married couples can jointly give up to $20,000. You can also make tax-free gifts of any amount to charities and unlimited payments to health-care and educational institutions to cover a relative or friend's medical or tuition bills. An even bigger bonanza is the so-called marital deduction, which lets you give during your lifetime or bequeath at your death as much as you want to your spouse tax-free as long as he or she is a U.S. citizen. (If your spouse is not a citizen, consult a tax adviser; the rules that then apply make Ulysses seem like an easy read.) The write-off has its limitations, though: if your spouse ends up with more than $600,000, you may only postpone the estate tax until his or her death. One way to solve that problem is through the judicious use of trusts. For example, a bypass trust (sometimes called a family or credit-shelter trust) lets both partners in a marriage take advantage of their separate $600,000 estate-tax exemptions to pass as much as $1.2 million to their heirs tax-free. In this arrangement, you bequeath assets worth up to $600,000 tax-free to the trust. The rest goes directly to your spouse, and because of the marital deduction, that bequest also escapes taxes. For the rest of your spouse's life, he or she can collect the trust's income and usually up to $5,000 or 5% a year of the principal, whichever is greater. After your spouse's death, your children or other heirs become the trust's beneficiaries. But because the trust was not under your spouse's control, the assets do not count toward his or her taxable estate. And as long as your spouse's own assets are less than $600,000, your estate makes the entire trip from you to your spouse to your children free of federal taxes.

Easing the Administrative Burden on Your Heirs

Property you pass to your heirs by means of a trust, life insurance or joint ownership goes directly to the beneficiary or co-owner. Property passed by your will, however, must go through probate, the legal process by which your will is proved valid in court, your assets are inventoried, your creditors paid off and the balance of your estate distributed to your heirs. Depending on the complexity of your estate and the efficiency of your local probate / system, your survivors might have to wait anywhere from a few months to several years for their full inheritances. In the meantime, legal and administrative costs could consume 5% to 10% of your estate. You can sidestep the whole mess by transferring your assets to a revocable living trust. In contrast to testamentary trusts, living trusts start operating while you are still alive. With a revocable living trust, you retain the right to change the trust's provisions, terminate it and usually serve as both trustee and beneficiary during your lifetime. (You will, of course, pay taxes on the trust's income.) Then, at your death, the trust effectively does the work of your will, either distributing your property among your heirs or remaining in force for their benefit. Nothing passes through probate.

For example, David Hurwitz, 72, and his wife Dorothy, 68, of Silver Spring, Md. set up revocable living trusts in 1986 to ensure that when they die, their three children -- Betsey, 37, Susan, 33, and Paula, 31 -- can benefit immediately from their inheritances. Says David: ''I didn't want my daughters to have to wait around for two years or so while my estate went through probate.'' Currently, David and Dorothy are both trustees of their own trusts, each of which contains their separately owned property, as well as their share of the assets they own jointly. When one spouse dies, that trust will expire and the property will pass into the trust of the survivor. After the second death, most of the assets will go directly to the Hurwitzes' daughters, with the remainder passing into a new trust to provide for family emergencies. Finally, after the death of the last surviving daughter, any remaining assets will be divided among the Hurwitzes' grandchildren. So far they have two: Avi and Eli, ages 7 and 5. If you have a revocable living trust, you will need what's known as a pour- over will, which directs that any property you failed to put into your living trust go into the trust at your death. Those assets will be subject to probate, but most states have streamlined proceedings for estates of $500 to $60,000. Once you've grasped the basics of estate planning, your next question may well be: Can I buy a book of forms or computer software and cobble together my own living trusts? The short answer is yes -- at your heirs' peril. Says Renno L. Peterson, an attorney in Sarasota, Fla. and the co-author of Loving Trust (Viking, $19.95): ''Drafting your own estate plan is like do-it-yourself brain surgery. At least an attorney is accountable for his mistakes. But if you mess up, your spouse can't sue you after you're gone.'' Unfortunately, because such trusts are just catching on, you may have trouble tracking down an attorney experienced in setting them up. To find one, ask your relatives, friends, accountant or the trust officer at your bank for recommendations, or get in touch with lawyers who belong to your local estate- planning council. (You can get the association's phone number from your city's bar association.) Interview at least three of the attorneys. While you probably can't judge their legal expertise, their responses can give you an idea of the care they take and their grasp of the problems you face. It's also important to consider how well you get along with them. Remember that you will be sharing with your estate planner both the intimate details of your finances and your dreams for your survivors. However you eventually find your attorney, start work immediately on your estate plan. Delay only risks hurting those who depend on you. Ginette Hirschfeld, 35, of Towson, Md. learned that lesson the hard way. Her husband Robert, a radiologist, drowned last year while swimming off the North Carolina coast, leaving Ginette to manage $2 million, much of it in stocks and limited partnerships. Though the money was sheltered from taxes by the marital deduction, the lack of an estate plan exposes everything over $600,000 to taxes at Ginette's death. Lee W. Warner, a financial planner in Timonium, Md., had long urged the doctor to draw up a plan. ''With a tragedy like this you hate to say, 'I told you so,' '' says Warner, ''but what happened to Dr. Hirschfeld should be a lesson to all procrastinators.''

BOX: What your estate will owe

You can estimate your federal estate-tax liability by filling out the worksheet opposite. First calculate the present value of your gross estate (line 1) by adding up these assets: -- Stocks, bonds, real estate and cash -- Household furnishings, motor vehicles, jewelry and collectibles -- Proceeds from your life insurance policies and annuities -- Retirement benefits, including IRAs and employer-sponsored pension and savings plans -- Gifts you've made with strings attached. For instance, if you gave your house to your daughter but retained the right to occupy it for life, the IRS would say that the house is yours. -- Property in a revocable trust -- Assets over which you hold general power of appointment. Say your father put stock in a trust over which he gave you general power of appointment. Since you would be permitted to distribute the shares to anyone, including yourself, the IRS considers the stock yours, even if you never touch it. -- Your share of jointly held property. If you own an asset with your spouse that he or she will automatically inherit upon your death, half of its value is included in your taxable estate. If your co-owner is someone other than your spouse and together you received the property as a joint gift or inheritance, half of its value also ends up in your estate. If you purchased the property together, the portion you paid for is part of your estate. If you live or have lived in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), all income earned and assets acquired by a married couple living in those states, except for individual gifts and inheritances, are considered community property, and half of it is included in each spouse's estate. Next tot up your outstanding debts (line 2), including mortgage balances, other loans, liens on your real estate, income and property taxes and credit- card balances. Also estimate funeral expenses and the cost of settling your estate (line 3). Court costs and attorney's, executor's, accountant's, broker's and appraiser's fees can claim 5% to 10% of your gross estate. To find your adjusted gross estate (line 4), subtract your debts (line 2) and final expenses (line 3) from your gross estate (line 1). You can leave your entire estate to your spouse tax-free because of the marital deduction (line 5). If you choose to do so, your spouse should fill out a photocopy of this worksheet to see if estate tax will be due when he or she dies. To determine your taxable estate (line 8), add any taxable gifts made after 1976 to your adjusted gross estate (line 7 plus line 4) and subtract your marital deduction and charitable bequests (line 5 plus line 6). You can make tax-free gifts of up to $10,000 a year each to as many people as you'd like; married couples may jointly give as much as $20,000. Prior to 1982, when those amounts took effect, the limits were $3,000 for individuals and $6,000 for married couples. To determine the amount of taxable gifts you've made, check the gift-tax returns that you filed after making taxable gifts. You can now use the table below the worksheet to estimate your tax bill. For estates above $600,000, brackets range from 37% to 55%. If your taxable estate totals $800,000 (column A in the table), federal estate tax before any credits are applied would be $267,800 (column B). You are entitled to a $192,800 federal credit against gift and estate taxes (line 10). (If you've paid any federal gift tax after 1976, subtract that too.) See column C for your federal estate tax minus the federal credit and fill in line 11. Finally, on line 12, you can deduct a $22,800 credit for state death taxes (column D) to find the federal government's share of your estate -- in this case, $52,200 (line 13).

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