May 31, 2006

$ and Sense

Three Steps In Planning Your Estate

Many people are working to accumulate assets with a goal of leaving a solid financial legacy to their beneficiaries. However, building your estate is just one part of the equation. Planning its distribution, even if your estate is of moderate size, is also important.

A carefully crafted estate plan can help ensure that your assets reach the people you choose, in the manner you choose. Equally important, such a plan may reduce, or even eliminate, estate taxes.

Developing An Estate Plan

The first step in beginning the estate planning process is assessing the value of your estate. Current federal law generally allows you to leave an unlimited amount to your spouse free of federal estate tax. However, transfers to non-spouses do not enjoy this tax-free transfer. If your estate is $2 million or more and you were to die in 2006, federal estate taxes may reduce the value of your estate to non-spouse beneficiaries. Amounts transferring to non-spouse beneficiaries over $2 million in 2006 are subject to federal estate taxes starting at 45% and rising as high as 47%, depending on the size of your estate. Recent tax law changes are likely to impact federal estate taxes over the next several years, so it is a good idea to plan your estate and meet with your attorney or tax advisor.

As a second step, review your family situation and objectives and consider: Is your spouse a capable money manager or should funds be left in a trust? (If the latter, who should be the trustee?) To whom should property pass after your spouse's death? Should all children be treated equally, or do any have special medical or educational needs? Should there be other beneficiaries — e.g., a university or charity? If you own a business, do you have a "buy-sell" agreement to facilitate transfer of the company stock? Do you have sufficient cash to fund the agreement?

If you have a family, your primary goal is probably for your estate to be passed on to your spouse and children in the amounts you intend. In any event, you may want to provide for the management of your financial affairs in the event you become disabled.

The third step is to consult with your financial, tax, and legal advisors who can assist you in the estate planning process.

Reduce Your Tax Burden

Depending on the value of your estate, an appropriately drafted will can help reduce, defer or even eliminate estate tax on your property. For example, if you write a will that leaves all of your assets to your spouse, he or she will not have to pay any estate taxes because of the "unlimited marital deduction." However, if your spouse does not remarry and he or she dies, his or her estate may be subject to estate taxes.

One way to lower your beneficiaries' future tax bite is to set up a "bypass" trust. Trusts are legal devices that hold property for the benefit of specified individuals or charities. Via a trust (established either outside or within your will), you name someone to manage assets placed in the trust in accordance with your wishes as expressed in the trust document. Trust assets can be placed in a variety of investments, including stocks, bonds, government securities, mutual funds, and certificates of deposit. Since money in a bypass trust does not go directly to your spouse, it is not considered part of his or her estate, but he or she can benefit from having the income and a limited amount of principal from the trust. Your other beneficiaries then receive the balance of the principal upon your spouse's death.

It's never too early to consult your financial, legal, and tax professionals to begin preparing for the future. Steps taken today may help ensure that your beneficiaries will receive as large a share of your assets as possible free of tax and in the manner and amounts you would wish.

For More Information

If you'd like to learn more about planning your estate, please call:

Michael Pellman

Financial Advisor-Retirement Planning Specialist

Morgan Stanley

Riverhead, NY


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