The Retirement Corporation of America

What Estate Planning Is All About

ESTATE PLANNING IS one of the most complicated—yet one of the most essential—financial planning chores you'll ever have to carry out.

Do it right, and your assets will be distributed among your heirs exactly as you specify—with little or none of your wealth lost to the estate tax, where the maximum rate is 50 percent.

Do it wrong, and fully half of your estate can be lost to taxation—with the distribution of your assets handled so poorly that it may trigger conflict that can tear your family apart.

Estate planning is a complicated subject, but nothing you can't master. Furthermore, you won't be asked to do the most difficult estate planning chores yourself. They are far too complicated to be left to one person. All you have to do is hire an attorney who is skilled in estate planning, and attend a few sessions at which your wishes and desires are discussed. The "heavy lifting" will be done by a professional.

Since it is 100 percent certain that you will eventually die, there is no point in being squeamish about things. Not planning your estate won't keep you alive one day longer, while your failure to plan will definitely cause problems for those closest to you after you die.

So accept the inevitable, and do some major-league estate planning while you are still around to do it.

Thinking About Who Gets What

These days, you are vigorous and healthy. If you want to rethink your financial plans, you can do so at any time. If you want to buy or sell a stock or mutual fund, you can do that any time you want. If you want to reward one of your kids for a good grade in school, you can open up your wallet and hand over a few dollars.

Because you are vigorous and healthy, you can make new plans, cast old plans aside, and literally manage your life as you see fit. There is nothing to stop you from doing so.

Obviously, however, that won't always be the case. In time, you will become old and infirm, maybe even seriously ill. Your mind may no longer be clear, or your physical condition may have deteriorated so much that tasks that once were simple have become very difficult—if not impossible—to carry out.

Even if you remain healthy and alert until the very "end", you are going to die some day. That will bring to an end your ability to make financial decisions and act on them.

There will still be the wealth you built up over the years. If you can no longer make decisions regarding your wealth—whether because of physical or mental infirmity, or because of death—someone else must make decisions for you. You don't want just anyone making those decisions. You want it to be someone you know and trust.

So that is one essential aspect of estate planning: making the plans about the management and disposition of your wealth when you are no longer able to do so yourself. Those plans are spelled out in your will and in various other documents you need to prepare well before your death.

If you don't make such plans, each state has a mechanism for letting someone else do the job. If you don't make adequate plans when you are alive, disposing of your wealth could fall to some political appointee whom you've never met and know absolutely nothing about.

The Taxing Side of Estate Planning

So that's one aspect of estate planning—doing what needs to be done now, so that your wealth is managed as you would want it to be managed when you are either dead, or in such a precarious condition that you can no longer manage it yourself.

There is another aspect to estate planning—and that is dealing with the fact that at your death, your wealth may be subject to a particularly burdensome tax: the estate tax, or "death tax" as it is often called. While Congress did change the rules about estate taxes in 2001, with an eye toward eliminating them altogether, what really happens to the estate tax over the long run is very much up in the air.

According to the 2001 law, the estate tax will stay around in one form or another through 2009. The tax will apply only to bigger and bigger estates, year by year, until 2009. That year, you would need a taxable estate of at least $3 1/2 million in order to be liable. And the maximum estate tax will keep coming down—from 55 percent in 2001 to 45 percent in 2009.

Then in 2010 the estate tax vanishes completely. Unfortunately, the way Congress wrote the 2001 law, it only vanishes completely for one year. In 2011, it roars back—pretty much as it was in 2001. The tax would hit any taxable estate of $1 million or more, unless Congress extends the estate tax repeal past 2010.

That leaves an awful lot of uncertainty surrounding estate taxes. Maybe they will apply, and maybe they won't. Maybe Congress will extend the 2001 law, and maybe they will let it die and let the estate tax come back. Because there is no way of knowing, the need for heavy-duty estate planning has become more acute.