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Let’s Face It, We’re All Going to Die Someday

Unless you’re one of those people riding around with a bumper sticker on your car that says, “I’m spending my kid’s inheritance,” it’s never too early to start planning the distribution of your estate.

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For most people, death isn’t something they enjoy talking about – or thinking about for that matter. But let’s face it, none of us is getting any younger. Well … except for Sophia Loren and Dick Clark.

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While many of you have worked hard in this industry for years – hoping you’ll someday be able to leave a solid financial legacy to your heirs – building your estate is just one part of the equation. Planning its distribution, even if your estate is of moderate size, is just as important.

A carefully crafted estate plan ensures that your property is distributed to your spouse, children and others as you would want. Equally important, such a plan may reduce, or even eliminate, estate taxes.

3 Steps for Developing an Estate Plan
1. Assess the value of your estate. Current federal law allows you to leave an unlimited amount to your spouse free of federal estate tax. Applying a federal tax credit of $220,550 (for 2000 and 2001) against estate taxes allows you to leave as much as $675,000 to beneficiaries (other than your spouse) tax-free. Any amount over $675,000 is then subject to a federal estate tax starting at 37 percent and rising as high as 55 percent, depending on the size of your estate.

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It may surprise you to discover how easily the value of your estate can reach the $675,000 threshold when you add the market value of your home, your collision repair shop, your investments, your personal property, your retirement benefits and the face value of any life insurance policies you own.

2. Review your family situation and objectives and ask:

  • Is your spouse a capable money manager or should funds be left in a trust? (If so, who should be the trustee?)
  • Where should property go after your spouse’s death?
  • Should all children be treated equally, or do any have special medical or educational needs?
  • Should there be other beneficiaries, e.g., a university or charity?
  • With regard to your shop, do you have a “buy-sell” agreement to ease transfer of the company stock? Do you have sufficient cash to fund the agreement?

If you have a family, your primary concern is probably to ensure that your estate is passed on to your spouse and children in the amounts you intend. If you’re not married, you may want to designate your beneficiaries and provide for the management of your financial affairs in the event you become disabled.

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3. Consult your financial advisor and tax professional, as well as an attorney who can draft an appropriate will and appropriate trust agreements.

Wills and Trusts: Reduced Tax Burden
Depending on the value of your estate, an appropriately drafted will can help reduce, defer or even eliminate estate tax on your property. For example, if you write a will that leaves all your assets to your spouse, he or she won’t have to pay any estate taxes because of the “unlimited marital deduction.” But, if your spouse doesn’t re-marry and he or she dies with a combined estate of more than $675,000, heirs may face stiff estate taxes.

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One way to lower your heirs’ future tax bite is to set up a “bypass” trust. Trusts are legal devices that hold property for the benefit of named beneficiaries. Via a trust agreement (established either outside or within your will), you name someone to manage assets placed in the trust and instruct how distributions are to be made. Trust fund assets can be placed in a variety of investments, including stocks, bonds, government securities, mutual funds and certificates of deposit. Since money in a bypass trust doesn’t go directly to your spouse, it’s not considered part of his or her estate – but he or she can benefit from having the income and a limited amount of principle from the trust. Your heirs then receive the balance of the principle upon your spouse’s death.

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Consider this example of how the marital deduction and a bypass trust could potentially eliminate the federal estate tax on $1.5 million of assets:

– At your death, the first $675,000 of assets in your estate would go into the bypass trust. This would generate a tentative tax of $220,550, but your federal tax credit would offset this.

– The next $675,000 would pass to your spouse outright (or through a marital deduction trust), which would be includable in your spouse’s estate. The entire amount would qualify for the marital deduction so, again, no tax would be due.

– At your spouse’s subsequent death, the bypass trust wouldn’t be subject to tax. The $675,000 passed to your spouse outright (or through the marital deduction trust) would be includable in your spouse’s estate, but the tentative tax of $220,550 would be offset by your spouse’s federal credit. So again, no tax would be due.

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Time Isn’t On Your Side
Unless you’re one of those people riding around with a bumper sticker on your car that says, “I’m spending my kid’s inheritance,” it’s never too early to consult your financial advisor, attorney and tax professional to begin preparing for the future. Steps taken today may help ensure your heirs will receive as much of your assets as possible, free of tax and in the amounts you’d wish.


Writer Thaddeus Toal is a financial advisor in Mclean, Va., and can be reached at (800) 488-4380 or (703) 790-7051. This article doesn’t constitute tax or legal advice. Consult your tax or legal advisors before making any tax- or legally related investment decisions. This article is published for general informational purposes and isn’t an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.

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Three Steps for Developing an Estate Plan

1. Assess the value of your estate.

2. Review your family situation and objectives.

3. Consult your financial advisor and tax professional, as well as an attorney who can draft an appropriate will and appropriate trust agreements.

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