It is important to evaluate the effects of federal and estate taxes on estate planning. An estate may be subject to taxes before it is distributed to beneficiaries.

A specified portion of an estate is exempt from estate taxes. During 2004 and 2005, the first $1.5 million of an estate could be distributed to children or others tax-free. The Tax Relief Act of 2001 increased the tax-exempt level to $2 million for the years 2006 to 2008 and $3.5 million for 2009. Federal taxes are imposed when your estate exceeds the limits mentioned.

Federal estate taxes on the taxable portion of the estate range from 45% to 48%. The Tax Relief Act gradually reduces the maximum tax rate to 45%.

While most gifts or estates are not large enough to pay federal tax, you should estimate your estate taxes based on your net worth. If your net worth is at or above the federal taxable limits, you can use strategies such as trusts, gifts, and contributions to minimize your tax liability. To assess your estate's value, add all assets, subtract any liabilities (including your mortgage), and also deduct funeral and administrative expenses. Do this periodically, as persons who have saved or invested for many years can have larger estates than they anticipated.

Keep in mind that if your estate’s value exceeds the exemption, the assets subject to tax upon your death may include cash, life insurance policies you owned, stocks and bonds, the family home, the family farm, tangible personal property (such as jewelry, clothing, art, furniture, china, computers, power tools, etc.), benefits under employee benefit plans, and retirement assets such as Individual Retirement Accounts (IRA's).

Lesson Contents

I. Introduction

II. Estate Planning

III. Power of Attorney: Planning for Incapacity

IV. Property Transfer: Documents and Legal Arrangements

V. A Will: Who Needs One?

VI. The Probate Process

VII. Personal Representative: To Carry Out Your Wishes

VIII. Gifting and Tax Strategies

a. Gifts and Unlimited Marital Deduction

IX. A Trust: Who Needs One?

X. How to Hire and Work with an Attorney

XI. Learn More

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Glossary

Case Studies and Resources

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Disclaimer

Acknowledgments

Prepare Your Estate Plan belongs to a series called Legally Secure Your Financial Future. The series also includes information to help you organize important household papers and to communicate your health-care wishes.