Five jump-overs of estate planning

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It is not a good thought to consider about your untimely death.  However consider the practical aspects of it – where your hard earned money will go, who can raise your children and what they should do about their inheritance.  Bad estate planning can get you in trouble.  There are many jump-overs and you should be aware of them.

Here are five such jump-overs of estate planning

1.    Leaving all your estate to your spouse

Is your estate exceeds one million?  Then this is certainly for you.

Under present law, whatever you leave to your spouse is exempt of the Federal estate tax.  In addition to this, you can leave $2 million to anybody tax free. This number will go up to $3.5 million in 2009 and will be unlimited for 2010.  The figure can drop back to $1 million in 2011.

Many people think that they should leave all their estate to their spouse.  This is halfway planning.  With this arrangement, there is no tax to your spouse but there’ll be a big hit when the spouse dies.

Let us take an example to explain this.  Suppose you have an estate of $4 million.  If you leave your spouse everything in your will, he/she will pay no tax. Now your spouse has an estate of $8 million. When your spouse dies he/she will inherit $8 million out of which there is exclusion for $2 million. The remaining money is subject to tax which is to be paid by your children.

There is one solution for this.  You should form a bypass trust.  So you’ll leave the amount of your exclusion to a trust for the benefit of your surviving spouse.  Your spouse can get all the income for health, education and maintaining the standard of living out of the income of the estate.  Your spouse can also tap the principal to the extent of five per cent or $5000 whichever is greater.

On the death of your spouse the property would go to your children without any estate tax.

By filtering your assets thru a bypass trust, you save your children the tax.  So only if your estate is more than $7 million you should face a federal bill for an estate tax.

2.    Giving your children everything in one shot

Most of the couples make an arrangement under which upon the death of the second spouse the entire estate is left to their children.  So once your children are aged 18, they will get whole assets.  This is a big mistake.  It is recommended that you should put the money in trust and they should get it when they need but their access is spread over a number of years.

So at the age of 18 they can get 5% of the estate, which can be useful for college fees and buying a car.  At the age of 21 they can get 10% which they can use for finishing their education traveling overseas.  At the age of 30 they can get 25 per cent of the estate which can be used for starting a new business.  At the age of 30 they can get 25 per cent of the estate probably for buying a house and for getting married.  And the balance of the estate they should get at the age of 35.

By making this arrangement you are allowing your children to mature and perhaps use the money for the appropriate reasons.

3.    Ignoring the disability provision

Okay, you made a power of attorney and sign it with your spouse.  However what about the disability clause?  If you become disabled or incompetent then laws of many states automatically provide withdrawal of your power of attorney.

The solution is simple –insert a clause saying that the power of attorney shall not be revoked in case of any spouse becoming disabled or incompetent.  And this can be ensured by hiring an attorney who specializes in estate planning.

4.   Ignoring Health Care directives

You should always identify other people to make Health care decisions.  So if you are not able to make that decision of pulling the plug, some family members should be authorized to do that. It is called living will. Remember, this living will is for protecting them and not for protecting you.

Normally such authorization is given to children jointly.  And if the children are under 18, you can include a third party to do this. This is because until then children lack the capacity to make such a decision legally.

5.    Failing to make a couple as Guardian

A very important clause in your will is selection of a person who will raise your kids if you and your spouse die.

Most often people make the mistake of naming one individual as a Guardian.  Suppose you have selected your brother for this work to take care of your young children.  Your brother dies accidentally.  In such a situation the contingent guardian should be the spouse of your brother.  If you do not make this selection of who will be the second guardian, your children may be pulled out of their present residence and they can suffer psychologically for this.  So its advisable to make a couple as Guardian in your will.

Go to a specialized attorney for inserting these special provisions in your will.  After all it is your money and you should ensure that it is going correctly after you.

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