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Important Estate Planning Steps
By Chad Carlson

While as much as $2 million (effective January 2006) may be passed on to your heirs without incurring federal estate tax, recent studies are reporting that approximately 60% of adult Americans do not have an estate plan. There are a variety of ways to decrease the taxable amount in your estate and through careful estate tax planning; many Americans are able to minimize estate taxes.

In my last column, we looked at 5 estate-planning basics and some important steps that investors can take to get started on their overall estate plan. This month, we continue with additional concepts that should be considered as a part of the planning process.

Plan for the distribution of your retirement assets

When a person passes away, retirement assets left with a previous employer often are overlooked by the family and aren't included in the overall estate. Making sure to roll these assets into a new investment vehicle is therefore an important aspect of every working American's estate plan. Because a large portion of family wealth tends to pass through retirement plans, it's important to plan carefully when completing the necessary beneficiary forms. When naming beneficiaries, it is wise to seek advice. There are certain long-term distribution opportunities that, when properly utilized, can greatly reduce the tax liability to your heirs.

Use gifting strategies to reduce estate tax liability

Gifting can be an excellent way to reduce the taxable assets in your estate. One common gift-giving method is the 529 college savings plan. Assets grow tax-deferred in these plans and, if used for qualified higher education expenses, can be withdrawn free of federal income tax. As of January 1, 2006, individuals will be allowed to gift $12,000 per year and couples can give away up to $24,000 per year. Another choice is the "accelerated gifting" option that allows for distributions of up to $60,000 (or $120,000 for a couple) but this method can only be utilized once every five years.

Maintain the liquidity of your assets

A common issue among families relates to cash flow planning and issues of liquidity. During your lifetime it's important to consider what sources of cash are being used to maintain your lifestyle. These sources often have drastically different tax consequences. Determining whether to use retirement plan assets, long-term capital growth assets, debt, and other sources for cash flow needs are options that need to be weighed in light of their tax cost.

Take steps to avoid probate

Probate is the court-supervised settlement of an estate. It can be a costly and time-consuming process that delays the transfer of assets to the beneficiaries of the estate. Probate also erodes the value of the estate. Your trusted advisors can help you take steps to avoid probate and through careful planning, you can avoid common mistakes and ensure that your heirs are not burdened by the emotional and financial stress of settling your estate.

Execute Powers of Attorney for healthcare and living wills

Recent studies indicate that only 18% of Americans have established a living will or power of attorney for health-care. The failure to execute written documents that clearly state your wishes in the event of incapacitation can have a devastating effect on families. Without a written legal document such as a durable power of attorney, health care proxy, or living will, families and physicians in many states cannot legally act based on a loved one's wishes. These simple documents can serve to ease the burden on your family members during life's most difficult times.

There is no better time than right now to make planning your estate a top priority. As the old saying goes, "The distance is nothing. The first step is tough." Don't be among the 60% that has failed to plan. As we enter into the New Year, investing your time now to plan for the future could be the best gift that you can give your family.

Chad Carlson is a Financial Advisor with Delta Trust Investments, Inc. For more information, contact Chad at (501) 975-4010 or by email at ccarlson@delta-trust.com. Delta Trust does not offer tax or legal advice and recommends that you consult your tax or legal advisor.