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Jewish World Review June 22, 2004 /3 Tamuz, 5764

Jan L. Warner & Jan Collins

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How do I plan my estate? | Q: My wife and I are approaching retirement age (mid-60s) and are trying to plan our estates. However, the more we read, the more confused we become about what is and isn't in our estate for estate tax purposes. Can we get wills that will take into consideration future growth, because we think we may have a taxable estate in the future and don't want the survivor to have to pay any estate taxes.

A: Today, an individual must have more than $1.5 million to be hit with estate taxes. Under current law, if you and your wife each leave everything to the other, there will be no estate tax at the time of the first's death, regardless the size of your estate. But there may be estate taxes due at the time of the second's death, depending on the value of the assets controlled at that time and the law in effect at the second's death.

That said, while the word "estate" is generally thought to mean what is left when you die, the term has different meanings. For example:


"Probate estate" refers to the assets an individual owns at death that pass either under a will or, absent that, by "intestate succession." This is when the court retains control of probate assets and, after the debts and any taxes are paid, oversees distribution of the remaining assets to the appropriate beneficiaries or heirs.

But generally, IRAs, joint bank accounts, insurance policies, annuities and other assets having "beneficiary designations" pass outside the probate estate directly to the beneficiaries. Therefore, "taxable estate" is not necessarily the same as probate estate because one's taxable estate will include all assets an individual controls at the time of death that may be subject to state or federal estate taxes — sometimes called "death taxes" or "inheritance taxes."

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For federal estate tax purposes, your "taxable estate" will generally include:

— All interests in property that you own in your name, and all property in trusts you control either directly or indirectly.

— The proceeds of qualified retirement plans, including 401(k)s and IRA's. It's important to remember that qualified retirement plans can also be subject to income taxes because of what is called "income with respect to the decedent" or IRD.

— The proceeds of life insurance policies if you own either the policy or the proceeds are payable to your estate.

Through appropriate planning with qualified professionals, you can remove assets from your taxable and probate estates and save both estate taxes and probate costs. Before you do, we suggest that you get a good handle on 1) the amount of your total estate at present; 2) the potential growth of your assets in the future; and 3) the increased cost for you and your spouse to live during your life expectancies, which will give you a pretty good idea about how much to expect to use from the earnings on your assets — or your assets themselves — to provide you with a reasonable standard of living.

One way to try to estimate the potential size of your estate in the future is to use the "rule of 72s" to establish a "growth pattern." Here's how it works:

If your assets are projected to grow at a compounded rate of 8 percent per year, by dividing eight into 72, your assets will double in nine years. If your assets grow at the rate of 6 percent, it will take 12 years for your estate to double. But based on the same increased life expectancy that should allow your assets to grow for a longer period of time, the cost of maintaining yourselves may not allow for projected growth.

To keep property out of your estate for tax purposes, you must give up both control over the asset and the right to receive benefits from the asset. Because unknown needs in the future can decimate the best estate plan, we think you should think twice before you cut those strings and surrender control.

Bottom line: Self-education is important, but it can be dangerous if you aren't guided by a lawyer and/or financial planner qualified in these areas.

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JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.


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© 2003, Jan Warner