Preserving and Transferring Wealth: Introduction

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Introduction
Why Plan?
The Essential Need for Estate Planning

Preserving and Transferring Wealth focuses on protecting the value of your assets.

To get an overview of estate planning, see our Estate Planning Guide for tips on wills, recordkeeping, probate and more.

state planning is a concept that is greatly misunderstood by many people. In simple terms, it may be defined as lifetime planning for the passage of assets in accordance with the estate owner’s wishes and at the least possible tax cost.

You already have an estate plan, even if you have done nothing. The problems with your unspecified plan are

Assets might not pass according to your wishes.
The federal government and the state in which you live may be major beneficiaries of your estate.

Why Do I Need a Will?

By neglecting to make a will, you have left your estate planning to your state government, with possible adverse results. First, a local court will have to appoint an administrator to manage your estate. This person, possibly a stranger to you, will have to be paid. Second, even if the administrator named is your surviving spouse, a bond will generally be required. Third, the amount of time required to settle your estate may be unnecessarily long. Fourth, part of your estate may pass to the federal and state governments in the form of avoidable taxes. Clearly, one imperative of estate planning is -- Don’t die without a will.

When Should I Plan?

In personal financial planning, an individual is generally considered to have three life cycles:

Accumulation cycle -- ages 25 to 45
Conservation cycle -- ages 45 to 65
Distribution cycle -- ages 65 and above

Estate planning, as well as all other phases of financial planning, varies during these three periods. Your estate plan is only one component of your overall financial plan, but it does have certain unique considerations.

The Accumulation Cycle

During the accumulation cycle, you should be sure that you and your spouse each have a will and that each of you has executed a durable power of attorney. Your will should name an executor for your estate and waive the requirement that your executor post bond. It is critical that in your will you name a guardian for your minor children; choosing the right guardian is probably one of the most difficult decisions you will ever have to make. Additionally, you need to make financial arrangements to provide the guardian with sufficient monetary resources to take care of your children. You should also consider executing a living will to express your desires concerning the use of extraordinary measures to prolong your life if you are not expected to recover from an accident or illness.

The accumulation cycle is viewed by many as the period for life insurance. A discussion of how much coverage you need is beyond the scope of this book, but you should recognize that your need is perhaps the greatest during this cycle, particularly if you have children. (You may also need life insurance during the conservation cycle, depending upon the age of your children and other factors.) You should recognize the critical need for obtaining sufficient insurance on the life of your spouse, regardless of whether he or she is in the work force or is serving as a homemaker. The costs of child care and home support are often overlooked when considering how much insurance is needed. Whether your spouse is in the work force or not, you would have to face a significant financial burden to either replace your spouse’s income or hire someone to care for your children and home.

In addition to life insurance, you should obtain adequate disability insurance for both you and your spouse.

To the extent it is financially feasible, you should consider transferring assets to your children (either in trust or under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act) to provide funds for their education. However, you should consider the effect of any asset transfers to your children on their arrangements with financial aid programs.

To the extent that you have accumulated net assets (including life insurance) in excess of the applicable exemption amount ($650,000 in 1999, increasing to $1,000,000 in 2006), you should start thinking about using the estate planning techniques described throughout this book.

The Conservation Cycle

In the early stages of the conservation cycle, your estate planning needs will probably not change significantly. As the amount of your assets increases, you may need to change the terms of your basic estate plan to take advantage of the savings available from the proper use or coordination of the applicable exemption amount and the unlimited marital deduction.

The need for insurance continues, particularly while your children are still in school. However, you should now consider the estate tax savings to be gained by transferring your life insurance policies to an irrevocable life insurance trust for the benefit of your spouse and children. If you have not already done so, you should consider the advisability of long-term care coverage.

It is critical during this period that you coordinate the benefits under your retirement plans (qualified and nonqualified plans offered by your employer, individual retirement accounts (IRAs), and so forth). This involves selecting payment options and designating beneficiaries under those plans. Proper planning for the payment of retirement benefits is often overlooked by many, and the results of improper planning (or none) can be detrimental to your family’s well-being. The rules in these areas are so complex that you should not elect any payment option or name any beneficiary without first consulting your tax adviser.

To the extent it is financially feasible, you should begin transferring (either outright or in trust) some of your assets to your children and grandchildren. If you have accumulated significant assets, you should consider using some of the more sophisticated estate planning techniques available for transferring significant amounts to your children, grandchildren, other heirs, and charities.

The Distribution Cycle

The distribution cycle is the period of balancing. How much can you afford to give away (or spend) and still provide adequately for your retirement and health care?

To the extent that you have significant assets, you should continue your lifetime gifting program. If your assets exceed $3 million, every dollar you give away saves 55 cents in estate taxes and makes that 55 cents available to your heirs.

You should carefully review your life insurance coverage to determine whether you should continue that coverage or perhaps "cash in" and switch to other investment vehicles.

Other Events Affecting When and How You Should Plan

Estate planning is an ongoing process. We have discussed general guidelines for estate planning above, but you should not lose sight of the fact that a life event (such as marriage, birth of a child, death of a child or spouse, disability, serious illness, inheritance, divorce, or career change) may require a revision of your existing estate plan.

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