A Will Is No Substitute For An Estate Plan

Tuesday, 24 February 2009

If preparing a will has left you feeling satisfied that your estate plans are complete, be wary, this probably is not true.  Especially not true if you have simply taken advantage of the unlimited exemption from estate taxes by leaving everything to your spouse.

The fact that your will might state that everything you own goes to your mate does not necessarily make it so.  The beneficiaries named in other documents - joint property deeds, insurance policies, pension plan papers, IRAs, 401(k) plans and the like - will award possession to whomever is named in them, regardless of what the will document may specify.

If the estate will total more than $1,500,000 (subject to indexing up to $3,500,000 in 2009), leaving everything to a spouse is a bad idea.  The reason is that in addition to the unlimited spousal bequest, one can leave up to $1,500,000 tax-free to other beneficiaries.  If you fail to leave anything other than to a spouse, you are forfeiting that option. Then, when the spouse dies, assuming he or she has not remarried, the tax-free estate is limited to $1,500,000 in 2004.

To put it another way, when an estate, including life insurance, approaches $1,500,000, each spouse should own part of it individually.  This, together with the proper wills, assures that $3,000,000 can be passed on to heirs free of estate tax, regardless of which spouse dies first.

The tax savings from these moves are not inconsequential, since estates currently are taxed at a rate of up to 48 percent.

If the estate will exceed this unified credit amount, (and with company benefits, insurance and inflated home values, that is not exceptional), one should consider naming other heirs.  To protect the spouse during his or her lifetime, $1,500,000 might be put in a bypass or credit trust, with the spouse enjoying the full income from it.  Then, after the spouse’s death, the trust proceeds go to the named beneficiaries, free of further estate taxes.

A will is a rather inflexible estate-planning tool, and it is not effective in reducing the long term effect of estate taxes or the probate expenses that might accompany settlement.

An estate plan should be reviewed periodically by both your financial advisor and attorney.

Brock and Associates, LLC is a financial planning firm specializing in asset protection and generational wealth preservation.

Add Comment