Put it in writing
Strategies for effectively managing your estate

Estate planning remains a pressing need
The tax reform legislation of 2001 brought plenty of welcome relief for taxpayers.
The law calls for the eventual elimination of the estate tax, a burdensome tax that
in the past could reduce the estate someone left to heirs by as much as 55%.

No reason to procrastinate

News of the repeal of the estate tax gave many people one more reason to avoid planning their estates. Many people already put off this important task because they don’t want to think about the day when they’re no longer around, and they’d rather not have to face the difficult decisions involved. Most investment professionals and estate planning attorneys, however, stress that estate planning remains a pressing need or a number of reasons. Estate planning isn't just about tax planning. Planning your estate also involves issues such as naming a guardian or minor children, deciding when your adult children will be ready to inherit their family wealth, and preparing or the possibility that you or your spouse become physically or mentally disabled.

The estate tax won’t go away until 2010. Under the new law,the estate tax won’t disappear until 2010. In 2002, the first $1 million of someone’s estate will be exempt from estate taxes. That amount will gradually increase until it reaches $3.5 million in 2009 — the year before the estate tax goes away. That limit may seem high enough to make estate taxes a concern only or the very affluent .But still, it’s important to remember that your estate includes all your assets — your home, your savings, your investments, and your life insurance policies. Before assuming you don’t need to worry about an estate tax, you may want to consult with an estate planning attorney. He or she can advise you on whether you need to do any planning to reduce the taxes that could come due on your estate if you died in any year but 2010. Under current law, the estate tax will come back in 2011. The new tax legislation has a “sunset provision.”

If Congress doesn’t take any action before 2010, the changes imposed by the new law will cease to apply, and the estate tax rules will revert in 2011 to what they were in 2001 with 55%as the highest estate tax rate and only the first $1 million of someone’s estate free from federal estate taxes. That much uncertainty doesn’t reduce the need or planning —it increases the need. The following pages provide an overview of the key tools used in estate planning and a summary of the major changes the tax law introduced. Becoming familiar —and comfortable —with this information can help you prepare for meetings with your professional advisers.

Develop a plan: Your action checklist

1. Don’t assume you no longer have to worry about the estate tax.
2. If you haven’t already,meet with an estate planning attorney. Ask your investment professional or a referral if you don’t have someone in mind.
3. Consider in advance who could serve as a guardian or your minor children.
4. Think about how and when you want your children to inherit the family’s assets.

Estate planning remains a pressing need

The tax reform legislation of 2001 brought plenty of welcome relief for taxpayers. The law calls for the eventual elimination of the estate tax, a burdensome tax that in the past could reduce the estate someone left to heirs by as much as 55%.

Highlights of the new tax law
The tax law passed in 2001 brought several major changes in the estate tax laws:

A repeal of the estate tax

• From 2002 to 2009, the amount people can shelter from estate taxes will gradually increase, and the estate tax rate will gradually decline.
  
• In 2010,the estate tax will be repealed.
  
• Unless there is further action by the U.S. Congress, the estate tax will return in 2011.

A burdensome tax scheduled to go away
The new federal estate and gift tax rules

Constant change over the next decade increases the need for careful planning. Beginning with gifts made in 2002, the applicable exclusion amount or lifetime gifts will be fixed at $1 million.

Change in “step-up” rules

Under current estate tax rules, when you bequeath assets to heirs,their cost basis in those assets “steps up ” to the value the assets had at your death. But when the estate tax is repealed, this step-up rule will no longer apply. Your heirs will inherit your original cost basis in the asset with two exceptions:

• $1.3 million worth of assets left to a non-spouse can be stepped up to their value at the date of death.
  
• $3 million worth of assets left to a spouse can be stepped up to their value at the date of death.

What you need to do: A planning checklist

1. Talk to your investment professional and attorney about how these rule changes affect you.
2. Ask if you need to consider changing your gifting plans.
3. If you have significant assets,be sure to keep detailed records so that your heirs will have information about your cost basis in those assets.

A will

A will is the legal document you can use to outline how you want your property and assets divided among your family members and other heirs. In your will, you can also name guardians for your children. Your will should also identify whom you want to serve as the executor of your estate. The executor will gather all your assets after you’re gone, ensure that a tax return is filed for your estate, and oversee the process of disbursing assets to your heirs.

A basic living trust

With a basic living trust, you transfer the ownership of all your assets and property to a ust. The assets in a living trust don’t have to go through the costly, time-consuming —and public —process of probating your estate in state courts. The trust assets can pass directly to the beneficiaries you designate. You can appoint yourself as both trustee and primary beneficiary so that you can maintain complete control over the trust before your death.

Bypass trusts

These trusts —also known as credit-shelter, A/B ,and marital trusts —preserve the estate tax exemption that you and your spouse can claim individually. In 2002, for example, up to $1 million of an estate can be exempted from estate taxes. By using bypass trusts,couples can preserve the estate
tax exemption or each partner in the marriage, thereby enabling $2 million to pass estate tax free to children. (Estate taxes apply only when estates pass to children and other heirs. No estate taxes apply when estates are left to a surviving spouse.) The gradual increase in the estate tax exemption and the eventual repeal of the estate tax seems to lessen the need for bypass trusts. But remember the estate tax is only being repealed, under current law,or one year — 2010. Be sure to consult your estate planning attorney to determine if bypass trusts could play a part in your
estate plan.

An irrevocable life insurance trust

All of your assets —including life insurance policies — are considered part of your estate. With an irrevocable life insurance trust, you can put life insurance policies into a trust so that they are not part of your taxable estate. If you die more than three years after putting the policy into the trust, the policy won’t be considered part of your estate, and no estate taxes will be imposed on the value of the policy. (If you die in less than three years after funding the trust,the policy reverts back to your estate.)

Know the basic tools
Familiarity with the tools of estate planning can make the process seem less daunting.

Additional trusts to meet a variety of needs
Trusts come in many varieties to meet specific needs.

• Special-needs trusts:Leaving an inheritance to a physically or a mentally disabled child can put them at risk of losing their eligibility for federal and state assistance programs. A special-needs trust can help you support a disabled child’s financial needs while also preserving their right to federal and state benefits.
  
  
• Qualified terminable interest property trusts (QTIPS): If you have children from previous marriages, QTIPS can help you protect their financial interests while also leaving your surviving spouse financially secure for the remainder of his or her life.
  
  
• Generation-skipping transfer trusts: If your children are already financially successful,you may want your estate to pass directly to your grandchildren. These trusts can help you lower the taxes that will apply when you skip a generation and leave significant assets to grandchildren.
  
  
• Charitable trusts: If you want favorite charities to benefit from your estate —before or after your death —talk to your estate planning attorney about the various types of charitable trusts you can use.

Annual gifts

In the past, people often used gifting strategies to reduce their taxable estate. Beginning in 2002, you can give away up to $11,000 annually,adjusted periodically or cost of living,without paying a gift tax. If you give more than that away each year,you can use up a portion of your lifetime gift and estate tax exemption to avoid paying a gift tax. When the estate tax goes away in 2010, you will be able to make gifts over your lifetime of up to $1 million without incurring a gift tax.(That $1 million lifetime exemption applies to amounts you gave away in excess of your annual $11,000 gift-tax exemption.)

If Congress enacts a law that will permanently repeal the estate tax, one of the incentives or gifting — reducing the size of your taxable estate — will be taken away. But if you’re charitable-minded or wish to see family members enjoy the benefits of your generosity while you’re still alive, you may want to continue your gifting plans. Be sure to consult your investment professional, estate planning attorney, and accountant to discuss how the new law may affect your gifting plans.

Make your plan effective
Take these steps to ensure your plan protects your family.

Keep your intentions clear

Draft a letter of instruction. A letter of instruction will let your family members know what initial steps they should take after you’re gone. In the letter be sure to:

• indicate where you keep important documents,
  such as bank and investment statements,your will,
  and life insurance policies
• provide the names and addresses of people to contact,
  including your attorney,investment professional,
  accountant,and executor of your estate

Keep your will current . Most attorneys recommend that you review your will every two years. Be sure to review it soon after any major life event, such as a divorce, a remarriage, a birth, or an adoption.

If necessary, take the time to ratite your assets. If you establish a living trust, be sure to take the time to transfer your assets into the trust. If you’re using bypass trusts and you live in a state that does not have community property laws, any assets you own jointly can’t get into a bypass trust. To make sure bypass trusts can be funded when you or your spouse dies, your assets must be owned in your individual names.

Avoid common mistakes

• Writing a “sweetheart will.” Leaving everything to your spouse may seem like the simplest, most romantic thing to do. But a sweetheart will can unnecessarily increase the taxes that your estate will incur when it eventually passes to your children or other heirs.

Holding assets jointly with children. Putting anyone other than your spouse as joint owner of an account can create unexpected problems. If the other person’s ownership interest in the account exceeds $11,000, you could incur a gift tax. If the person gets into financial trouble, creditors or the courts could go after the money in your account. Other steps — such as establishing a living trust or using transfer on death registrations or securities and mutual funds — can allow an easy transfer of assets at your death without creating the problems joint ownership does.

Bear in mind if you’re unmarried

1. Remember hat property shared by unmarried couples is generally governed by contract, not family, law. Whoever is listed on the title of an asset is considered the owner unless there is an agreement to the contrary. If you die,your partner — unlike a spouse — won’t have any legal rights to assets or property on which they were not a registered legal owner. Your partner can establish those legal rights only if you have an agreement that he or she was part owner. In a few states, a verbal agreement may be sufficient if the surviving partner can supply evidence that the agreement existed. But most states will accept only a written agreement.
   
   
2. Have a will and consider using trusts to protect your partner.
   
   If you die “intestate ”—that is, without a will — your partner won’t have any legal rights to assets held in your name because the states’ intestacy rules protect only legal relatives, and an unmarried partner is not considered a legal relative. For that reason,it ’s essential that you don’t put off writing your will.
   
   If you have a sizable estate, your partner won’t benefit from the “unlimited marital deduction” on estate taxes. For instance, in 2003 the first $1 million worth of your estate will be free of estate taxes, but any amount over this limit that you leave to your partner will be taxed. You can use trusts to limit the taxes on your estate and allow your partner to inherit a greater portion of your assets. Your investment professional, accountant,and attorney can give you more details on how to put the proper tools in place.

Take several simple steps on your own

1. Designate beneficiaries for your IRAs, pension, and life insurance and keep your designations up to date. None of these assets have to go through probate if you have designated a beneficiary. Your beneficiary can immediately take ownership of each asset. It’s
   not uncommon for people to forget to change their beneficiaries after a divorce, a birth ,or a death in the family. To avoid complications for your family after your death, be sure to keep your beneficiary designations up to date.
   
   
2. Use Transfer on Death (TOD) registrations for securities.
   You can’t name beneficiaries for mutual funds, stocks, or bonds that you own in personal accounts outside of an Individual Retirement Account. But you can use a Transfer on Death registration. The person you name will automatically become owner of the security when you die. A TOD registration isn’t like joint ownership because you still maintain sole ownership and control of the security while you’re alive. But the security will pass to the person you’ve named, without having to go through probate, when you die.

Prepare for incapacity

As part of your estate plan, you’ll also want to take steps to protect your family if you become seriously ill or disabled. Consider taking advantage of the following tools.

Long-term care insurance. If you’re wealthy enough to cover the costs of a prolonged nursing home stay and if you’d rather not have to impoverish yourself to qualify for the nursing home coverage provided by the state Medicaid programs, you’ll need to consider buying long-term care insurance. Your insurance agent or investment professional can help you find a policy that provides sufficient coverage without being prohibitively expensive.

A durable power of attorney. With this document, you can name someone to manage your financial and personal affairs if you no longer can. Among the powers you can grant are the authority to make gifts, conduct real estate transactions,assign ownership of a life insurance policy, or change a policy’s beneficiary. If you have a basic living trust, you may not need to use a durable power of attorney because your successor trustee can make decisions about the assets you own in your trust. If you’re not willing to spend the money associated with establishing a trust,however, consider using a durable power of attorney.

A living trust or durable power of attorney can also help you maintain your privacy. If you do not have either tool in place and become disabled, someone will have to petition the court to appoint a guardian to oversee your affairs. Such petitions are part of the public record. If you’vet named an executor or your living trust or a durable power of attorney, such petitions Aaron’t necessary.

A health care proxy. This document enables you to designate another person to make health care decisions on your behalf if you become incapacitated. Hospitals, doctors, and other health care providers are required to follow your proxy’s decisions as if you were making them.

A living will. In this document, you can specify the type of medical treatment you wish to receive and under what circumstances the treatment should or should not be administered. Your attorney can help you prepare these documents in compliance with any applicable federal or state law requirements.

Put your mind at ease

The availability of so many different estate planning tools allows you to be very creative in addressing specific needs. As you work with your advisers, you’ll probably find that planning your estate Ian’t that complicated. And once you have your plan in place, your family will be better off, and you’ll have peace of mind,knowing you’vet done the right thing to secure their future.