Estate Planning Isn’t Just About Taxes

Last year the estate tax exemption amount was increased to $5 million (returns to $1 million in 2013 unless Congress acts sooner). If your net worth is under this threshold, you might be thinking you can put off estate planning. From a tax-planning perspective, the increased exemption amount takes some of the pressure off. But estate taxes are only one piece of the estate planning puzzle. In fact, there are critical nontax issues you need to think about.

Appointing a Guardian
If you have minor children, appointing a guardian for them in your will may be the single most important estate planning decision you’ll make. If you don’t name a guardian, then in the event of your untimely death a court will make the decision for you. Consider both family and nonfamily members, based on a variety of criteria – from religious beliefs and educational values to age and financial security.

Be sure to discuss your wishes with potential guardians to be sure they want the job. And once you make a decision, name at least one backup guardian in the event your first choice dies, becomes disabled or simply changes his or her mind.

Avoiding Probate 
Estate planning can also help you avoid probate. Probate is a court-supervised proceeding for establishing the validity of your will, valuing your estate, paying certain expenses and distributing your assets to your heirs. Not only can probate be expensive and time consuming, but it also exposes your financial affairs to public scrutiny. You can avoid probate by using a revocable “living” trust – except in certain limited circumstances. Further, use of beneficiary designations and other techniques that allow assets to be transferred directly to your heirs outside your will can eliminate the necessity of a probate estate.

Protecting Your Assets
Many estate planning techniques can protect your assets against creditors’ claims (both your creditors and those of your family members). Asset protection is important regardless of the potential for estate tax liability.

Simple asset-protection techniques include transferring assets to family members, titling property in a manner that avoids certain claims, and making contributions to qualified retirement plans. More sophisticated techniques include domestic or offshore asset-protection trusts and family limited partnerships.

Shaping Your Legacy
Money can be a powerful motivator. Regardless of your estate tax situation, you may want to share your values with your heirs and influence their behavior. For example, you can design a trust that provides your child with a financial safety net but also offers incentives to lead a responsible, productive life.

You can condition trust distributions on virtually any criteria you wish, such as graduating from college, staying gainfully employed, or simply reaching a certain age. One common technique is to link trust distributions to beneficiaries’ earnings – the more money they make on their own, the more they receive from the trust.

Keep in mind, that this approach can penalize heirs who make less money yet lead lives you’d be proud of. One possible solution is to outline general criteria – both financial and nonfinancial – for distributing trust funds and let the trustee determine whether your heirs have met them.

Plan Now 
|The $5 million exemption may make estate taxes seem like a remote possibility. But keep in mind that, unless Congress intervenes, the exemption amount will drop to $1 million beginning in 2013. So you need to be prepared for that contingency. Even if you’re confident that Congress will make the $5 million exemption permanent, however, the nontax issues are at least as important as – and perhaps more important than – reducing taxes.

Note: On November 17th, House Representative James McDermott of Washington introduced legislation (HR 3467) to lower the exemption amount to $1 million and raise the estate tax rate from 35% to 55% beginning January 1, 2012. 

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