By Andrea Bennett, Jean Sherman Chatzky, Borzou Daragahi, Amy Feldman, Judy Feldman, Leslie Haggin Geary, Roberta Kirwan, Penelope Wang, Cybele Weisser

(MONEY Magazine) – A father tells his firstborn that as a graduation gift he and Mom are paying off her college loans. When she thanks him, flabbergasted by her parents' gesture, he smiles and says, "That's what money is for." What is your money for? In this 18-page package, we address the here-and-now questions that take center stage in our lives--everything from having enough life insurance or naming an executor in a will to figuring out the best way to save for college or what to pay the babysitter. The details of our financial lives can be devilishly tricky, and without a clear road map it's easy to feel lost.

The change in our federal tax laws means that enduring maxims of family finance have taken new twists. And families themselves continue to change. The 2000 Census brought home the fact that the traditional configuration--dad/mom/kids/puppy--is no longer the only standard; instead we have an ever-expanding variety of groups that are similarly tied by love and allegiance. Marriages form and re-form. Couples sign contracts or create households without any legal structure at all. Single parents raise children on their own. Children take care of parents. And in all our homes, throughout the tumult of jobs and bills and preparing for emergencies, one note always rings true--that, more than anything, cherishing one's family is what money is for.



Should I pay off my mortgage or save more for retirement? 76 How much does it cost to raise a child? 76 Should spouses have separate financial accounts? 76 What is the best way to save for college? 79 Is my family spending too much? 79 How can I protect my family if I lose my job? 80 How much should I pay a babysitter? 83 How can I talk to my elderly parents about their finances? 83 To marry or not to marry? 83 How much debt can I afford? 84 How many credit cards should my family have? 84 Should I allow my kid to have a credit card? 85 What's the cost of divorce? 86 How do I cut auto insurance fees for my teen? 86 What are the costs of fertility treatment and adoption? 86 Do I need a prenup if I remarry? 88 How do I keep illness from depleting my assets? 90 Who needs wills, trusts and proxies? 90 Do I have enough life insurance? 92 How should I choose beneficiaries? 94 Should I pass down wealth now or when I die? 94 How do I pick an executor for my estate? 94 How do I disinherit a family member? 96 How do I choose a guardian for my kids? 96

Should I pay off my mortgage or save more for retirement?

Nobody likes a lingering financial obligation, so why not simply pay off your mortgage as soon as you can? Aside from the emotional gratification of feeling debt-free--which is of immeasurable value for many people--a mortgage-free home is also an asset that can be drawn against for emergencies or even as a retirement kitty.

But we'd encourage you to think twice because, in purely financial terms, it is rarely the best strategy. If you have extra money after paying the bills and funding tax-deferred retirement plans to the max (and perhaps socking away a few dollars for your kids' college tuition), the smart thing is to invest what's left. Here's the math: Since interest on mortgages is tax deductible and current mortgage rates are averaging around 7.25%, families in the 28% tax bracket need earn only 5.5% annually on their investment to come out ahead. For those in higher tax brackets, the break-even point is even easier to reach. (If you're paying more than 8% on your mortgage, you should at least look into refinancing.)

What about the argument that paying off a mortgage gives you guaranteed savings in a way that investing doesn't, since you forgo years of interest payments? That is certainly true. But the value of those savings may not be as great as you imagine, especially since it is spread out over all those years. Over the long haul, you're likely to find compounding returns far more rewarding.

Plus, by paying off your mortgage, you're giving up on one of the great vehicles for wealth creation: leverage. Let's say you've got the cash to pay for a $250,000 house. If you put down only, say, $50,000, and later sell the place for $300,000, you've made 100% on your investment--and left yourself free to put the other $200,000 to work elsewhere (which should compensate for your mortgage costs). On the other hand, if you put the whole quarter-million into the house, your rate of return would be just 20%. Your financial options and liquidity would be more limited.

There are a few caveats to bear in mind, however. Leverage can be a good thing, but it can also be dangerous, and many people leveraged themselves to the hilt during the '90s boom. If you stretched your finances dramatically to buy a home and now find yourself house-rich but cash-poor, cutting your debt exposure is absolutely the right call: For you, trimming a mortgage will give you more financial flexibility.

The second caveat is for those who know, without a doubt, that they will live in their house forever. If you're in that position and find yourself longing for the certainty of that guaranteed interest savings, no one could criticize you for taking advantage of it.

Should spouses have separate financial accounts?

Many married couples approach this question as if it's an either/or proposition. But there are many choices in between. According to money therapist Olivia Mellan, co-author of the new book Money Shy to Money Sure, you're best off letting your money merger evolve during your marriage, as if it were a relationship of its own, rather than forcing the issue.

At the beginning of a marriage, Mellan recommends keeping at least some assets separate until you have a true handle on your partner's money habits. You may have married someone who has a problem with debt, who overspends or who's a miser--someone who has different financial habits and priorities than you do. You may want to merge some assets for joint savings, household expenses and an emergency fund, in part so you can get to know each other better in this critical area. The amount each partner contributes should be proportional to assets and income, advises Mellan.

Each partner also needs a credit card in his or her own name. This is simply a practical matter. Half of all first marriages still end in divorce; more than half of subsequent marriages end in divorce. If you find yourself living on your own again, you'll need a credit history to buy a car, purchase a home, rent an apartment and so on.

As your financial relationship with your spouse matures, consider combining more of your assets, opening investment accounts for retirement purposes or your kids' college costs. But that doesn't mean that you have to merge them all, Mellan emphasizes. In fact, 401(k)s and IRAs can't be merged, which offers each spouse the chance for some financial autonomy. Do be sure, though, to coordinate your investing strategies so that you're well diversified. And if one spouse leaves the work force to care for children, that spouse can and should continue to fund his or her own IRA each year.

What is the best way to save for college?

For many parents, saving for their children's college education is their No. 1 financial priority. Admirable, yes, but wrong-headed. Your top financial goal should be saving for your own retirement. After all, your child will have other options, such as taking out a student loan or perhaps qualifying for financial aid. But face it, no one is going to give you a loan for your retirement.

That said, if your retirement plan is on track, stick any additional money into a college savings plan, pronto. The good news is that starting next year, the new tax rules provide improved tax breaks for college savers. The Education Savings Account (also called the Education IRA) now allows investors to stash $2,000 annually vs. just $500 previously. Eligibility for these accounts has also expanded to include married couples with adjusted gross incomes of up to $220,000 (up from $160,000). Another big break: Savers in state-sponsored 529 savings plans will be able to make federal tax-free withdrawals for qualified college expenses. You will even be able to contribute to your Education IRA and 529 plan in the same year. (Although the tax rules are set to expire in 2011, most financial advisers expect Congress to extend the education tax breaks.)

Which savings option should you choose? The right strategy depends on several factors: your tax bracket, the investment flexibility that you require and the amount you have to save. You should also consider the likelihood that you will qualify for financial aid. Be aware that colleges are increasingly taking education savings into account when calculating a family's need for grants or loans.

Families in the 31% federal tax bracket or above (taxable income of $109,251 or more for married couples filing jointly), for instance, are unlikely to receive much aid, points out Raymond Loewe, a financial planner with College Money in Marlton, N.J. These families are therefore good candidates for 529 savings plans, which typically allow anyone to put away several thousand dollars a year on behalf of any beneficiary; there are no income limits. In many states, you may also receive a state tax deduction on contributions to a 529 or an exemption on withdrawals (which can also make these plans worthwhile for residents in lower brackets). The state plans differ widely, however, so check carefully before you invest: Read "The 529 Solution" in MONEY's April 2001 issue, or visit or

But 529s aren't for everyone. The money must be used for qualified education expenses only (otherwise you will face taxes and penalties on withdrawal), and you have little control over your investments. Once you pick a fund, you have to stick with it for at least a year, and can switch out only by transferring to another state's plan. Also, money withdrawn from a 529 could reduce the amount of financial aid you might otherwise receive (which is why 529s are best for families that aren't counting on aid).

If you prefer more control over your investments, and you meet the income limits, you may be better off with an Education IRA. You can choose from just about any funds or stocks, and you face few limits on switches. Another advantage: You can use the money for elementary and secondary school costs, not just for college. (However, deploying those assets early in your child's life will leave less in the account when college bills roll in.)

For those in lower tax brackets--as well as those who figure they might need to tap their college savings in an emergency--there's always a regular taxable investment account. Buy-and-hold investors who qualify for long-term capital-gains treatment can come close to matching the returns of a tax-advantaged plan.

Other savings methods look much less attractive under the new tax rules. There's little reason to consider a Roth IRA for college savings, for example, since earnings withdrawn for education payments will be taxed unless you have invested for at least five years and you have turned 591/2. (The 10% penalty will be waived for higher education expenses.) You're better off with the Education IRA. As for putting money in your kid's name in an UGMA/UTMA account, forget it. The tax breaks are minimal, and you lose control of the money. Opt instead for a 529 plan, which offers superior tax advantages, while allowing you to remain the owner of the account.

Whatever type of savings plan you choose, be sure to gear your investments to the age of your child. Here's one rule of thumb: From birth to age 12, put 80% or so of your college portfolio in stocks for maximum growth, with the rest in bonds or cash. At age 12, start trimming your equity allocation by regular amounts each year, transferring the money to cash or short-term bonds. The goal is to have the cash you need by the time your child is 18 and the first tuition bill comes due. This way a sudden market collapse, like the one we just experienced, won't derail your child's college plans.

How can I protect my family in case I lose my job?

There's no such thing as total job security, especially when times get tough. Which is why we should all have an emergency fund. Unfortunately, if you're like most people, you probably find it hard to commit to a just-in-case account. Keep in mind that the assets are meant to cover basic expenses, not to supplant all your current income. Here's our three-part action plan.

Make a bad-times budget. Total up your fixed expenses--housing, car payments, utilities and so on--and add an occasional movie or night out. Being unemployed is tough enough without sacrificing a modest amount of fun money. Assume, also, that you'll need to cover some job-search expenses. Now you know what you need to get through a month.

Guesstimate how long you'd be out of work. You've likely heard the maxim that an emergency fund should cover three to six months' worth of expenses. But where do you fit on the continuum? In general, single wage earners or dual-income couples with no dependents should have three months' set aside, says Jim Blinka, head of the executive compensation and employee benefits consulting division at BDO Seidman. Conversely, families with lots of dependents or hefty fixed costs (such as a mortgage or college tuition bills) should plan for a more prolonged stretch without a paycheck--at least six months--because the long-term repercussions of exhausting your cushion are more dire.

Middle- and upper-level executives, professionals in volatile industries (can you say dotcom?) and other high earners also need to fund a long period between jobs. "The average search time for executives earning over $100,000 is about a month longer than other wage earners in the same community," says John Challenger, CEO of international outplacement firm Challenger Gray & Christmas.

Set up a dedicated account. Once you've settled on a target figure, start making regular deposits into a dedicated emergency account. Try to build your savings quickly, but don't stop funding other important goals like retirement. When you're starting out, build up your cash in something safe, like a money-market fund. (To find the best current rates, turn to page 154.) Once you've accumulated enough to cover your cushion, funnel those emergency savings into a diversified portfolio of stocks, bonds and cash. "If you're keeping six to 12 months' living expenses in a money fund throughout your lifetime, you're missing opportunities," says David Rhine, regional director of family wealth at Sagemark Consulting.

How can I talk to my elderly parents about their finances?

Broaching the topic of finances with your parents can be touchy at any age, but it's especially tough when they're elderly. For your part, you don't want to appear greedy and overly interested in an inheritance; for your parent, fears of dependency, incapacity and death can stifle meaningful discussions. Says Dr. Sandra Timmermann, a gerontologist and director of the MetLife Mature Market Institute: "Parents fear the loss of control, and it's up to you not to take the control away. Instead, you want to strike a balance between safety and independence."

If family relationships have not been smooth, a discussion about finances could bring up past conflicts and hard feelings. But if you are empathetic and supportive, a conversation that demonstrates your concern can break down those barriers. One key: Make plans before there is a family emergency, at a time when tensions are low. If possible, include your siblings. You may want to start by saying something about yourself to break the ice, like: "I'm thinking of buying long-term-care insurance for myself, what do you think?"

Suppose your parents adamantly refuse to discuss their finances? Ask a trusted friend of your parents to prod them to talk to you. If your parents' cultural traditions make talking about money a sensitive (or even taboo) topic, hire an experienced financial pro of the same ethnicity as your family.

Your first goal is to learn the full scope of your parents' medical and financial situation, including the names and addresses of their financial and legal advisers. You also want to know where they keep financial documents such as Social Security numbers, investment accounts, insurance policies, safe-deposit box keys, tax returns, wills and other estate-planning documents. If they resist, encourage them to at least make a list of these items and let you know where it can be found in case of an emergency. (Perhaps suggest they file it with a lawyer or other adviser.)

Goal two is to determine whether your parents' current financial situation will provide sufficient income for their future. Even a well-funded retirement plan can run out of money too soon if it's poorly constructed. If changes are required, the sooner you raise the issue, the better.

When it comes to estate planning, some older adults believe it's enough to simply add an heir's name to bank accounts or on stocks or bonds so that they are jointly held. Not so. If the parent becomes disabled and can't sign his or her name, the other owner usually can't make any changes to the account. Solution? Discuss the benefits of having your parent give you a durable power of attorney or draft a revocable living trust. Both give you the authority to conduct your parent's business and financial affairs if he or she can not.

For more on how these and other estate-planning tools work, see the table on page 90. For details on buying a long-term-care policy, read the question on protecting assets in case of illness, also found on page 90. A roster of elder-care resources appears at the top left of this page.

How many credit cards should my family have?

According to, a consultancy that tracks the U.S. credit-card industry, the average American family totes around 14.7 pieces of plastic. That's at least three times as many as you need. Most families should have no more than two to four cards per adult--and preferably just two. One card should be used for major purchases that you need to pay off over time; it should have the lowest interest rate available. The other, to be used for convenience purchases, should be paid off in full every month. This second card (which could even be a debit card) should have no annual fee--and should be your affinity card, enabling you to collect perks such as frequent-flier miles. Some exceptions to the have-only-two rule: If you have a home business or you frequently expense business purchases, it may be easier to track reimbursements and deductible expenses on a separate card. Also, if you are loyal to a certain retail store or gas station where you already spend significant dollars, a credit card might give you access to special deals or discounts.

There are real drawbacks to piling up plastic: It's a temptation to accrue excess debt; it can reduce your ability to qualify for loans; and it leaves you more vulnerable to credit-card fraud. As Robert McKinley, CEO of, explains, "If someone rips you off, it's a real mess to clean up."

If you currently carry a full deck of cards, pay off any outstanding balances and start canceling. But don't let your overall credit limit get too low. Aside from the fact that you may need to tap your credit cards in case of an emergency, having little or no available credit can, ironically, look just as bad on your credit score as having too much, says Gerri Detweiler, a consultant at the debt counseling organization When you're canceling unused cards, Detweiler advises, get rid of your newest ones first. The credit-scoring folks look for a history of responsible debt management, so the older your accounts, the better.

Should I allow my kid to have a credit card?

At a time when college students graduate with an average credit-card balance of $3,000, it's not a bad idea for parents to teach kids to manage credit before they leave home, says Detweiler, author of The Ultimate Credit Handbook. Start when your child is 15 or 16 by getting a card with training wheels, like Visa Buxx ( It looks like a credit card (your teen is sure to like the fact that it's embossed with his or her own name) but is actually a stored-value card: You deposit money (a kid's allowance, for example, or baby-sitting earnings) in the account; your teen spends it. And--if you're smart--you'll tell your child that once the money's gone, it's gone. Then stick to it. The nice thing about Visa Buxx is that fees are generally minimal since many issuers waive or lower their fees if the parents have a credit card with their bank. The downside: It doesn't help your youngster build a credit rating. That's why a year before college, you should upgrade your kid to a real credit card and a checking account. If your child is 18, he or she can get a card independently. If not, co-sign for a joint card, but instill in your teen that the card is his or her responsibility. We recommend that you make the following agreement with your teen: He or she makes the charges and pays the bills, but you get to see the new statement each month to make sure there's no running balance.

What if your kid starts to blow it? Make sure that at least the minimum is paid (remember that your credit is on the line). Then Detweiler suggests some tough love: Haul your teen to the local Consumer Credit Counseling center (you can find one at and let a stranger explain how messing up a credit rating can hurt peoples' chances of getting the car they want, the apartment they're savoring, even the job they aspire to. "It's much more effective than hearing the same message from you," Detweiler notes.

How do I cut auto insurance fees for my teen?

Call it a rite of passage or the biggest headache of your parental life. Either way, when your teen hits the road with a freshly minted driver's license, your insurance bills will hit the roof. A son could double what you're paying now; a daughter can up your bill by 50%, explains Jeanne Salvatore of the Insurance Information Institute. The reason: Teen drivers are four times as likely to have an accident as adults. Nevertheless, you can keep costs down if you shop around.

Enlist the aid of your insurance agent. Ask if discounts are available if your teen gets good grades, passes a driver's education course or plans to drive an old but safe clunker rather than a speedy sports car. A good insurance agent will clue you in to the right discounts. Also, adding your child to your own policy will generally cost less than getting a new one just for your son or daughter. And if the kid has his or her own car, you can always lower premiums by purchasing only liability coverage (though if it's a new or late-model used car, you may want the extra protection). Finally, if your child is going away to college without a car--and the campus is at least 100 miles from home--request a discount for the months he or she will be away.

Emphasize safety. Since accidents or speeding tickets and other driving infractions drastically hike insurance premiums, make it clear to your teen that bad driving habits can be dangerous and expensive. Many states are even implementing graduated licensing programs that restrict the hours of unsupervised driving for young drivers. But even in states where these precautions are in place, it's wise to plan accompanied practice sessions under a variety of weather conditions, in heavy-traffic areas and at night. And of course, keep reminding your child to always wear a seat belt, not to talk on a cell phone while at the wheel--and never, ever to drink and drive.

Do I need a prenup before I remarry?

Conventional wisdom says that prenuptial agreements, by their very nature, imply ambivalence toward marriage: At least one spouse isn't really willing to commit. When it comes to second marriages, though, we think that stigma should be resisted. In a second marriage, the complications of the "yours, mine and ours" syndrome of blended families (which includes both children and assets) can generate tensions that just weren't there while you were courting. (It's one reason that remarriages have even worse survival stats than first marriages.)

Whether you're inclined toward a prenup or not, you should discuss what you'll share freely and what assets you've reserved for yourself and for your children. Being open and honest about your financial concerns and plans for your assets is critical at this stage. You should share tax returns and complete financial statements. Remember that in most states, if you don't have a prenup or postnup--or a signed written agreement that clearly outlines what is not community property--the surviving spouse has the right to a fixed share of the estate without regard to the will, says New York City estate-planning attorney Myron Kove.

And don't forget to write in a sunset clause: If you have children together or remain married into old age, you both may be ready to make your financial relationship as unconditional as your emotional one. Definitely leave that door open.

How can I keep illness from depleting my assets?

The numbers are sobering. By age 85, Americans have a 50% chance of needing long-term care. In 2030, when the youngest boomers turn 65, nursing homes will run $190,600 a year, reports the American Council of Life Insurers, up from $55,000 today. The best way to prepare for these escalating costs depends on your age, your assets and your health.

While you're working. Disability insurance replaces income if illness or injury keeps you from work. You may get this coverage at your job. If so, be sure it will replace at least 67% of your pay. To determine how much your coverage will pay out, check Northwestern Mutual's Disability Insurance Gap Calculator at

If you need to supplement an employer's policy or get coverage independently, Peter Katt, a fee-only life insurance specialist, advises that you buy residual coverage. These policies help you replace income you've lost because your disability forced you to work less or take on a lower-paying job. You can trim costs with a long elimination period, the time before benefits start. (The standard is 90 days.)

In retirement. Long-term-care insurance is generally the best way to protect assets against chronic-care costs. But there are two caveats: You've got to be healthy enough to qualify--which is why many pros advise buying a policy when you're in your fifties. (A policy that pays $150 a day, adjusted for inflation, for up to five years, costs $1,500 a year for a healthy 55-year-old, and $4,200 for a 70-year-old, according to N.P. Morith Inc., a long-term-planning company.) And you must be able to pay the premiums over the long haul. According to the United Seniors Health Council, that means having assets of least $75,000, excluding your home and car, and income of $25,000 to $35,000 for singles and $35,000 to $50,000 for couples. If you have very substantial assets, say $600,000 or at least $100,000 a year in retirement income, you may be better off buying a policy that pays a smaller daily benefit. This would allow you to save up to 50% on premiums, and still protect your assets if you're hit with a chronic long-term illness, says Nancy Morith of N.P. Morith.

Choose a top-rated insurer. Check A.M. Best (; A++ or A+ rating). Look for a comprehensive policy covering care at home, nursing facilities or assisted living; an inflation rider if you're under 75; and coverage for five years. For more information, check Long-Term Care Planning: A Dollar and Sense Guide (; 800-637-2604; $19.50). Whatever your decision, remember that even a benefit of $150 a day may not pay the entire cost of nursing-home care.

If you can't afford (or can't qualify for) long-term-care insurance, Medicaid will pay for chronic care, but only after you've spent down most of your liquid assets except your house, one car and burial expenses. (Federal law allows the spouse ofa Medicaid recipient who is in a nursing home to keep a maximum of $87,000 in additional assets.) Asset and income levels vary by state. For your state, go to www.hcfa .gov/medicaid/stateplan. Two possible ways to keep your assets in the family and still be eligible for Medicaid: a long-term program of gifting or setting up a trust. The rules are complicated, so you should get the advice of an elder-care lawyer.

Do I have enough life insurance?

You already know that life insurance is a must if your family depends on you. The question is, how much coverage do you need? The American Council of Life Insurers (ACLI) offers this rule of thumb: five to seven times your annual earnings. But this formula can vary and "is very much a personal matter," says Herb Perone of ACLI. The more expenses and dependents you have, the more insurance you'll need. If you've got fat retirement accounts or other assets (like an education savings fund for your kids), you can get by with less. But at a minimum, you should leave your family enough to cover big-ticket items like your mortgage and your children's college tuition. The Internet offers an abundance of fast, free places to get a rough estimate of your life insurance needs, plus rates. Among them:

You'll also face a choice between term and whole-life insurance. We recommend term insurance, which is much cheaper and provides more benefits for the dollar. Term coverage is also cheaper the younger you are. (The monthly premium for an annually renewable $500,000 term policy for a healthy 40-year-old who has never smoked runs $31 to $36 a month for a man, and $28 to $31 for a woman.)

That said, you're buying a policy that may not have to pay out for decades, so buy from a firm that's financially sound (A++ or A+ ratings from A.M. Best;; free; or A+, A or A- ratings from Weiss Ratings; 800-289-9222; $15 for rates given over the phone, or $7.95 to get data online).

How should I choose beneficiaries for specific accounts?

This is not a trivial decision, even if you already have a will. While state laws vary, naming a person as an account or policy beneficiary generally overrides any designation in a will. And if you fail to file your beneficiary paperwork at all (or if your primary beneficiary is deceased and you haven't named a contingent beneficiary), the money will go to your estate. In that case, the assets may need to go through an expensive and lengthy probate process.

So take these designations seriously: review your decisions whenever you experience a major life event, such as the birth of a child, divorce or remarriage, and certainly whenever you change your will. (You want all the paperwork to be in sync.) And always name a contingent beneficiary.

One tax tip: If you are giving an IRA to more than one beneficiary, have the financial institution divide the account now to reflect your wishes. If you don't, your heirs will need to liquidate the account--and pay all taxes--to divide the assets. By creating separate accounts, you give each beneficiary the option to take advantage of tax-deferred savings in the IRA throughout his or her lifetime.

Should I pass down wealth now or wait until I die?

Estate planning is a mix of the emotional and the practical. If you think that now's the time for your daughter to take possession of the family's long-cherished diamond brooch, then by all means give it to her while you can enjoy seeing her wear it.

But there's a more prosaic reason to start passing down your wealth now, and that's estate taxes. Forget any preconceived notions about who gets hit with them. (Hint: You don't have to be Bill Gates.) If by the year 2011 you expect your assets--including retirement funds, investments, home and life insurance benefits--to be worth more than $1 million, you've got a potential estate-tax bill on your hands. Although the new tax law slowly increases the amount you can leave to heirs tax-free (up to $3.5 million in 2009) and repeals estate taxes altogether for one year (in 2010), the breaks vanish in 2011. At that time, estates exceeding $1 million will be subject to the so-called death tax once again. And as of next year, gifts made during your lifetime that exceed $1 million will be subject to estate taxes.

How should you navigate around these limits? Each year, you can give up to $10,000 to any person you want, and to any number of people, without it being counted against your lifetime gift- and estate-tax exclusion. Pass along assets that will appreciate, such as stocks, mutual funds or a house, so they don't grow in your estate. If you want to give more, you can pay anyone's educational or medical bills without triggering gift taxes, so long as you send payment directly to the institution.

There are, of course, a variety of more complicated tools available. (See the box on page 90 for a sketch of some of them.) If you have a potentially significant estate, sign up with a quality estate lawyer and get a plan in gear. There's no reason your hard-earned wealth should go to anyone--including Uncle Sam--you don't want to have it.

How do I disinherit a family member?

Deciding who gets your assets after you die is difficult enough, but what if you want to make sure someone isn't included? Sure, the word "disinherit" conjures up images of screaming family fights, but there are many reasons to do it. Maybe one of your children is a wealthy entrepreneur and another has special needs, or perhaps you are in a second marriage and want to provide for your children from a previous marriage--but not for your ex. Cutting out anyone other than members of your nuclear family is easy; just leave them out of your will. But states have special protections for spouses and children.

Spouses. If you live in a community property state--Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin--the law assumes that your spouse automatically owns half of everything you both earned during your marriage. But there are ways to define money that is yours, separate from the community property, to make sure it goes where you want when you die, says Chris Croft, a California attorney and certified financial planner. But both spouses must sign a written agreement that explains which assets belong to each partner. Since there are different rules about separating commingled funds (assets owned by each person in a jointly held account) even in community property states, you should consult an attorney.

All other states give your spouse the right to claim one-quarter to one-half of your estate, no matter what your will provides. In these cases, you're out of luck--though, practically speaking, the provision kicks in only if your spouse goes to court to challenge your will.

Ex-spouses. Your ex has no claim to your assets when you're gone unless he or she has some claim against your estate before you die, such as a qualified domestic-relations order--a court order that awards a portion of a retirement benefit or pension to your ex. "It simply depends on how the assets were separated at the time of the divorce," New York City estate-planning attorney Gideon Rothschild says.

Children. In most cases, you can disinherit a child (or a grandchild) simply by stating that in your will. But don't think that just "forgetting" to mention children automatically leaves them out: They'll have an easy time contesting if you don't make your wishes plain. There are a few state-by-state protections for children too. For example, most states have laws to protect against accidental disinheritance, if a child was born after you drafted your will and thus isn't mentioned. Again, unless you specifically say that your baby is out, he'll be legally entitled to the same share as your other children.