Saving through Good Estate Planning

Regardless of the size of your estate, careful estate planning will ensure that your money is distributed according to your wishes and help minimize the effect of punishing estate taxes. The most basic document in estate planning is a will, which is just an itemized list of your liquid and property holdings with instructions on the manner in which they will be divided. In most states, there is no need to hire an attorney to write a will, and there are a number of online programs that can guide you through the process of creating one at little cost. Make sure to update your will regularly as your circumstances change.

When writing your will, whether alone or in consultation with an attorney, it is important to understand the taxes to which your estate will be subjected. The law that expired in 2009 stated that estates valued above a certain threshold ($3.5 million) are taxed a higher rate by the federal government than other types of income. However, the estate tax 2010 legislation has not yet been passed by both the House of Representatives and the Senate, so as of January 1st, there is no federal estate tax. Until a new estate tax law is ratified, even large estates will not be subjected to the 45% federal tax.

While this loophole is certainly a welcome break, most experts believe that it will be short lived. Even after the tax is reinstated, there are steps which may be taken in the estate planning phase that will lessen the effect of the high federal tax. Trusts, which distribute small amounts of money over a prescribed period, will help heirs defer estate taxes. Spouses are exempt from paying estate tax, so leaving all assets in the care of your spouse will ensure that nothing is lost to taxes. Experts also recommend that some assets be distributed before death, as small cash gifts between individuals may be given tax free.