Wills have been in the news a lot lately. There was a lot of talk about Elizabeth Edwards changing her will just before she died to exclude her philandering husband. And Congress has increased the exemption from the federal estate tax to $5 million per individual or $10 million per couple. But the point of this article is that your will is something you should probably review from time to time for the simple reason that things change.
For example, your life may have changed since your wrote your will. As for tax laws, they’re changing all the time. All the latest change means is that fewer than 4,000 families are now likely to be stuck paying the 35% inheritance tax bill in 2011 and while the new estate deal expires at the end of 2012, the $5 million figure is unlikely to come down.
The message here is that whatever your age, marital status or net worth, you need a will that says how you want your assets distributed as well as what’s known as living will that ironically states your wishes about end-of-life care. It also makes sense to have a health care proxy that names someone to make medical decisions for you if you can't and a durable power of attorney who can act on your behalf in financial and legal matters if you can't.
If your life is relatively simple and you don’t want to spend a lot of money, you can prepare a will yourself using downloadable software. It beats nothing which is what more than one out of every two American has. If you have children or substantial assets, or live in a state with its own version of an estate tax, it pays to have a lawyer draw up your will.
And then once you draw up your will dust review it if there are any major changes in your life such as a divorce, loss of a spouse, remarrying, or any reason you think may have an impact on who you want to leave your money to.
Old wills
Many couples have old wills that were designed to preserve the estate tax exemption of the first spouse to die, which is something the law does now automatically. Under these old wills, when the first spouse dies assets equal to his or her federal estate exemption go into what’s called a "bypass trust" for their children. The surviving spouse had access to the trust's earnings and, if need be, principal, but what's in the trust by-passed the survivor's estate.
Couples in a second marriage will want a fixed amount in a bypass trust to make sure children from their first marriages aren't left out. Many couples in stable first marriages often just leave everything to each other and include a backup "disclaimer" trust for the children.
Currently 21 states and the District of Columbia have estate or inheritance taxes, or both, in place for 2011. Estate taxes are levied on any amount above an exemption--typically $1 million--left to someone other than a spouse. Inheritance taxes are based on who gets the cash and can hit the first dollar of a bequest. So, for example, Maryland imposes an estate tax of up to 16% above a $1 million exemption and a 10% inheritance tax on every dollar left to a niece, nephew, friend or lover, but not on money left to children, grandchildren, parents or siblings.
Couples worth $2 million or more living in Maine, Maryland, Massachusetts, Minnesota, New York and Oregon, which all have $1 million state estate tax exemptions, will still want to put at least $1 million in a bypass or disclaimer trust at the first spouse's death.
As in past years you can make annual gifts of up to $13,000 to as many people as you want without worrying about gift taxes. If you want to give even more, there's a lifetime gift tax exemption that jumps to $5 million in 2011 and 2012, up from $1 million in 2010. The estate tax lapsed in 2010, but the gift tax didn't. Any gift tax exemption used reduces an individual's estate tax exemption. The generation-skipping transfer tax, an extra tax on gifts and bequests to grandkids if their parents are still alive, also now has a $5 million exemption, up from $1 million in 2009.
Most of us less wealthy folks can make good use of the gift exemption, too in order to avoid state taxes. Oddly most states with inheritance and/or estate taxes don't tax gifts. One exception is Tennessee, which imposes up to a 16% tax on gifts above $13,000 a year to close relatives and above $3,000 to others.
So if you have enough left for your own retirement years, you can start reducing prospective state tax bills by making gifts. This is also a boon for unmarried couples who want to transfer assets between partners. Be careful, however, of quirky state laws such as in Maryland where gifts made within two years before the donor's death get hit with state inheritance but not state estate tax.
Who knew there was so much uncertainty around death and taxes?
