Financial News & Tips

Published 12:00 am Wednesday, July 28, 1999

Alan S. Moore / L’Observateur / July 28, 1999

How should you transfer your assets to provide for your family’s future? How can you control the potential estate taxes? Answering these central estate-planning questions may be easier if you know the basic steps to follow.

1. Estimate Your Net Worth

Estate planning begins with an estimate of your net worth – the market value of all your assets, including investments, retirement accounts, home, other real estate, etc., less the outstanding amount of all yourdebts. Once you list your assets and establish a realistic valuation, youcan determine your potential estate-tax situation, as well as the asset management requirements for your estate.

2. Make a Will

The second estate-planning step is to arrange for the eventual transfer of your assets to whomever you want to own them after your death. Thisrequires you to make a will in order to prevent the state from deciding who gets your assets and to achieve possible savings in both estate taxes and probate costs. You will need to consult your lawyer (and perhaps youraccountant, trust professional, or other financial advisor) when you are ready to have your will drafted.

At that time, you may want to consider granting a health care proxy to someone who can make health care decisions if you should become unable to communicate them yourself.

3. Consider Making Annual Gifts

Does your net worth estimate show that your estate potentially will be subject to federal estate taxes? The tax rates on gifts and estates start at 37 percent when considering the unified credit and top out at over 55%, and they generally apply to every dollar above an applicable exemption amount. This year, the exemption is $650,000. It will rise annually until itreaches $1 million in 2006. Spouses can leave each other an unlimitedamount tax free, but the assets of the surviving spouse above the estate tax exemption will be taxed when they eventually pass from a surviving spouse to children or other heirs.

An annual giving program is a simple and easy strategy for reducing potential estate taxes. Tax law allows a gift-tax annual exclusion — alimited amount that you can give each year tax free to an unlimited number of individuals. This amount is currently $10,000 (or $20,000 forspouses who consent to split their gifts). A series of such gifts canaccumulate to become a substantial tax-free transfer. For example, acouple who gives $20,000 a year to each of their three children over a ten-year period would be able to effect a tax-free transfer of $600,000.

By utilizing the annual gift tax exclusion, you leave your current $650,000 intact.

4. Use Trusts

You may also consider setting up one or more trusts to assign responsibility for assets to a trustee who will administer the trust and manage the assets for the benefit of your named beneficiaries. A livingtrust that takes effect during your lifetime can reduce or eliminate the probating of your estate and provide skilled asset management if you become disabled. A trust you create in your will is a good way to leaveassets to minors. And, various irrevocable trusts can eliminate or reduceestate taxes. For example, married couples often establish credit sheltertrusts in their wills so that their estates can take full advantage of their estate tax exemption amounts ($650,000 each in 1999) to reduce taxes. Atrust can also ensure continuing professional management for the trust assets.

5. Write a Letter of Instructions

Finally, you can write a letter detailing your assets and financial arrangements as a guide for your surviving family. This simple step caneliminate searching for essential information and help prevent delays in settling your estate.

For More Information

You need professional help to benefit from the advantages of estate planning. Please contact your financial advisor if you want to exploreplanning possibilities within the context of your own financial and family situation.

(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.)

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