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| Investing in Tomorrow's Child | |
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PROTECT YOUR CHILD'S FUTURE WITH ESTATE PLANNING By Carolyn Joyce "Estate planning? Who, me? No, all I need is a simple will..." When notorious recluse Howard Hughes died in 1976 without a will, $336 million - 70% of his estate - went to the government in taxes. A few hours of financial advice and some documentation could easily have cut that amount in half. Understanding the Unified Tax Credit (UTC) is a good first step toward planning and protecting your estate. |
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Many people think estate planning is only for the very wealthy (the word "estate" probably causes some confusion). While tax planning is critical for those with sizable assets, estate planning is something even those with modest assets can benefit from, according to Tony Craddock, Waddell & Reed's assistant vice president of insurance marketing. In fact, anybody with assets of any kind should carefully plan the disposition of his or her estate. "Without a plan, and with only a simple will, your estate could go through a lengthy probate procedure during which a portion of your assets will go to court fees instead of to your heirs," Craddock said. Your will could be contested, resulting in even more expense and frustration for your loved ones, especially your children. Ultimately, the court could dispose of your property in ways inconsistent with your wishes. Without good planning and the right documentation, your estate could face taxes of up to 55 percent, greatly eroding the amount you leave to your loved ones. There is no downside to estate planning. If you want to pass on your possessions and property to someone of your choosing, and if you want your wishes carried out as you intend, you need an estate plan. "A successful estate plan ensures that assets are transferred as quickly and easily as possible, with minimal tax erosion. It can also arrange for the management of your assets after your death and provide for your personal care and asset management in the event of your own incapacity," Craddock added. Furthermore, if your estate's value is or shows signs of becoming high enough to trigger federal taxes after your death, an estate plan can help you reduce or even eliminate that tax liability. There are a number of estate planning guidelines that people often fail to follow. Three of the most common mistakes are: 1. Neglecting to make a comprehensive inventory of all present assets. 2. Consequently having no accurate sense of potential future worth. 3. Not understanding the Unified Tax Credit (UTC). With today's strong economy, assets can grow at a rapid pace, and individuals or couples may not recognize the potential value of their assets. Most people glance at their assets (sometimes even overlooking things) and assume their net worth isn't, and won't ever be, great enough to warrant careful planning. "However," Craddock said, "the combination of real estate, personal possessions, equity, bond and mutual fund investments, cash retirement plans, pensions, 401(k) and other profit sharing plans, and life insurance policies, in conjunction with a swiftly rising stock market, has turned people of modest means into surprisingly affluent investors within just a few years." And if your estate is already significant, a lack of planning could result in taxes that take more than half of it. "This is why understanding and wisely using the UTC is so important," Craddock added. The UTC stipulates the amount of assets you can leave at your death on which estate taxes do not have to be paid. This year and next, the amount of assets that can be passed on free and clear of estate taxes if $675,000 for an individual and $1,350,000 for a married couple. This amount will increase in increments until 2006 to $1,000,000 for an individual and $2,000,000 for a married couple. According to Craddock, making maximum use of the UTC is one of the most beneficial things you can do for your heirs. An estate plan will help you focus, first, on making a comprehensive inventory of everything you own - you may have assets you're not even aware of. Then the plan can guide you through reallocating your estate and shifting assets out of it to minimize estate taxes, leaving more to your heirs and less to the government. Carolyn Joyce is the District Manager and Financial Advisor for Waddell & Reed Financial Services. For more information, call 1-888-249-1433. To
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