Certain investments, such as life insurance, retirement plans, annuities, payable on death (POD) accounts, and individual retirement arrangements, allow you to select a beneficiary. The beneficiary is the person or people you want to receive the asset when you die. You name them on a beneficiary designation form supplied by the insurance company, your employer, your bank, or the investment firm managing the asset. If there is a properly completed beneficiary designation, it doesn’t matter what your will says since the proceeds will be inherited by your named beneficiary or beneficiaries, even if your will says something different. What happens if there is no beneficiary named or your beneficiary has died? The beneficiary then becomes your estate and your will, if you have one, determines who receives the assets.

The most common forms of joint tenancy assets are bank and brokerage accounts and real estate. The best example is a joint checking account. Check the title on a bank account. If you see the letters JTWROS (Joint Tenants with Rights of Survivorship) or JT TEN (Joint Tenants), it’s a joint tenancy account. There can be more than two joint tenants. Assets owned as joint tenants with the right of survivorship will pass to your joint tenant on your death, no matter what your will might say. Another form of joint tenancy is tenancy by the entirety, which can only be between a husband and a wife. Today, we usually see this only with real estate.

Joint tenancy and tenancy by the entirety are different from tenants-in-common. Each tenant in a tenancy-in-common ownership owns an undivided interest in the property or asset. But on the death of a tenant, his or her share becomes part of his or her estate. It does not pass to the other tenants. Any asset that can be owned as a joint tenant can also be owned as a tenant-in-common. If you’re unsure how property or an account is titled, check with your financial planner, lawyer, or the branch manager of the bank where you have your account.

Individual assets are those without a beneficiary designation and in your name alone. They could be a car, checking account, shares of stock, or real estate. If you’re the only one that owns it, it’s an individual asset.

Individual assets, together with any part of a tenants-in-common asset, form your estate. How these assets are distributed, as we noted earlier, is part of your estate plan.

In Chapter 15, “Estate Planning Wills: Testaments, Trusts, and Other Tools,” we discuss how to implement your estate plan by using wills and trusts. But what happens to your will and trusts when you die? It depends on your estate plan and the state in which you reside. You’ve probably heard the term probate. Probate is the court “proceeding” that proves a Last Will and Testament to be valid or invalid. If your will is valid, your named executor or personal representative is provided with Letters Testamentary authorizing him or her to act on behalf of your estate. If there is no valid will and you die intestate (described in the following section, “A Guide to the Purposes and Benefits of Estate Planning”), one of your relatives may apply to the appropriate court for Letters of Administration, which would allow him or her to act on behalf of your intestate estate. Each state is different, but generally a spouse or child would be the first individual considered to fulfill the role of administrator. The appointed administrator may be required to obtain a surety bond in the approximate amount of the estate assets. A surety bond is like an insurance policy to ensure that the administrator does his or her job.

You may have heard a lot about the need to “avoid probate” at all costs. Probate in certain states can be very expensive, with probate costs tied to the value of the estate. For example, in Florida, California, New York, and Massachusetts, the probate process is cumbersome, time consuming, and requires a great deal of court involvement. Alternatively, in some states, such as Pennsylvania and New Jersey, the probate process is incredibly simple and inexpensive with little involvement by the courts. Where you live, therefore, may influence how your estate plan is implemented. We’ll talk more about this in Chapter 15.

Let’s face it, most of us want our hard-earned money to go where we want it to go, whether it’s to our loved ones or a favorite charity. And we want it to be used for the purposes we intend, especially if the beneficiary is a child or a disabled person. But if we don’t specify these things, they will be decided by the laws of the state in which we reside. Says Joanne, age 32:

The state will decide if you don’t? That’s right. If you die without a will or other testamentary document (for instance, a trust), you have died intestate—without “testifying to your wishes”—and the intestacy laws of the state where you live determine who will receive your assets.

In Kentucky, for example, if you die intestate and own real estate, your real estate will first pass to your children or the descendants (your grandchildren or great-grandchildren) of any child of yours who has already died. If you have no children, it passes to your father and mother, or the survivor of them. If neither of your parents is living, it goes to your brothers and sisters or their descendants if they’re not then living. And if you don’t have siblings, your real estate goes to your spouse. If your spouse isn’t living or you’re not married, it’s left to your grandparents or their descendants (which means your aunts and uncles or your cousins). So let’s think about this. If you’re married and you own real estate in your name only, and you don’t have a will, your spouse will only receive your property if you aren’t survived by your children, your parents, your siblings, or your nieces and nephews. This may be what you want—but we bet a lot of you would rather have your spouse receive your real estate before some of your nieces and nephews.

Let’s consider Florida. If you die without a will, and you’re married and don’t have descendants (children, grandchildren, or great-grandchildren), your spouse gets everything. If you’re married with descendants and the descendants are also your spouse’s descendants, your spouse receives the first $60,000, plus half of your remaining estate; your descendants receive the other half. If your descendants are not your spouse’s descendants, your surviving spouse receives half and your descendants the other half. If you’re not married, your assets pass to your descendants, and if none, to your parents. If your parents aren’t living, your estate goes to your siblings or their descendants, and if none, to your grandparents or their children (your aunts and uncles), then to your cousins, and then to the “kin of your last deceased spouse.” Finally, if you have no living relatives, your estate passes to the state of Florida to be used for the state’s school fund.

And then there’s New Jersey. The intestacy laws are similar to Florida, with two exceptions. First, if you’re a registered domestic partner in New Jersey (New Jersey allows homosexual couples and unmarried couples over the age of 62 to register as domestic partners), your domestic partner is treated as a spouse. Second, if you’re survived by a spouse and no descendants, your spouse receives the first 25% of your estate (but not less than $50,000 or more than $200,000) plus three-quarters of the balance of your estate, with your parents getting the rest of your estate. If your parents aren’t living, your spouse gets it all. Third, if you don’t have living relatives, then your stepchildren or their descendants will receive your estate. What’s important is that these stepchildren don’t have to be your last spouse’s kids. That means the children of your first spouse whom you haven’t spoken to in 30 years could benefit from your estate. Yikes!

Again, would the preceding distribution of your assets reflect what you want? We doubt it. If you’re cohabiting, for example, your significant other would get nothing but heartache when you die. And if you’re gay, unless you live in one of a handful of states, your partner would be out of luck. So what do you do? Make sure you have a valid will or other testamentary document. Of the hundreds of individuals we surveyed for this book, most said that caring for their loved ones on their death was their biggest concern. So why let the government determine who receives your assets when you can decide?

Harold Ivan Smith, in his book Finding Your Way to Say Goodbye, agrees:

Exactly. Sally, age 37, adds,

That’s yet another reason why you should make estate planning a priority.

In addition to deciding who benefits from your estate, you can pick who acts on behalf of your estate. This is your executor or personal representative. It’s a job that usually lasts for a year or two, depending on the size and complexity of your estate. Your will could also name a trustee to control funds for your beneficiaries.

Perhaps the most important reason of all to have an estate plan, and specifically a will, is to name a guardian for your minor or disabled children. It’s critical that you identify and name the person you want to raise your children if you die. We discuss these positions at length in Chapter 15.

Of course, the amount of planning that is required will depend, for example, on the value of your assets, your wants and wishes, taxes (if any), and the age and health of your beneficiaries.

As Margaret Mitchell wrote in Gone with the Wind, “Death and taxes and childbirth! There’s never any convenient time for any of them.” Make them death taxes, and you’ve just put two of life’s inconveniences together. That’s right: Depending on where you live, the size of your estate, and who your heirs are, there may be taxes due upon your demise.

There are several different death taxes. Let’s start with state taxes. Depending on your state of residence, there may be an inheritance tax or state estate tax. Generally, an inheritance tax is determined by who receives assets from your estate and what their relationship is to you. In New Jersey, for example, there is no inheritance tax if the beneficiary of your estate is a spouse, child, grandchild, parent, or charity. If you leave your estate to a friend or cousin, the tax is about 15 percent. The tax on property received by brothers and sisters and children-in-law is 11 percent. In Kentucky, there is no inheritance tax due if your beneficiary is a parent, child, grandchild, sibling, or spouse. Kentucky’s inheritance tax ranges from 4 to 16 percent for beneficiaries who are children-in-law, aunts, uncles, nieces, nephews, and great-grandchildren. If you’re anyone else, including a cousin, the inheritance tax falls between 6 and 16 percent. Of course, imposition of inheritance taxes is a little more complicated than this, but we wanted to provide you with some examples.

In addition to an inheritance tax, there may also be a state estate tax. Before 2001, state estate taxes were directly linked to the federal estate tax and the state death tax credit. That’s no longer the case, which has drastically decreased the taxes paid to the states. Some states have responded by creating their own tax structure. New Jersey “decoupled” from the federal estate tax structure, which means if you have a taxable estate greater than $675,000, New Jersey estate tax will likely be imposed. Florida doesn’t have taxes on death, or any income tax for that matter. (It’s not just the warm weather than makes everyone retire to the Sunshine State!) Talk to your accountant and attorney to learn more about the current tax laws in your state.

So now we get to federal taxes. There’s been a lot of discussion about the federal estate tax. Currently, an estate valued at over $2,000,000 must file a federal estate tax return. The maximum tax rate is 45 percent. Here’s an example: If you die in 2007 and have a taxable estate of $2,500,000 (all of your assets less any deductions, such as funeral expenses, attorney fees, medical bills, and money left to an American spouse), the federal estate tax due would be approximately $230,000. Not exactly a small number, would you agree?

There’s one other federal tax you may have heard about. It’s called the federal generation skipping transfer tax. If you decide to leave assets to someone who is two generations younger than you, an additional tax is imposed. The objective is to discourage folks from skipping their children and leaving assets directly to their grandchildren. This tax doesn’t apply to small inheritances. In 2007, it applies only to transfers over $2,000,000.

So now you understand the other piece of the estate planning puzzle: tax reduction. Betsy’s aunt failed to complete her planning. The result, as Betsy, age 52, puts it:

If deciding who you want to receive your estate isn’t enough incentive, estate planning can often reduce taxes due on your passing.

You’re probably thinking, “There’s no way I have enough money to worry about this!” Well, get out your calculator and let’s see. To determine if you might have a taxable estate for federal or state purposes, start adding up your assets. Consider the value today of the following:

Don’t be tempted to exclude certain items from your estate just because you think the IRS won’t find out. We’ve sat through many audits. The IRS knows what to look for, and they’ll find it. Honesty is always the best policy. Robin, age 58, recounts her experience:

If the dollar value of your assets exceeds $2,000,000 and you die in the year 2007 or 2008, your estate will be required to file a federal estate tax return. If you’re like many people, you had no idea that you had such a big estate.

Now, whether tax will be due is dependent on your deductions. You receive a deduction for all items left to your spouse if your spouse is a U.S. citizen, as well as charitable bequests made at death. All of the expenses associated with your death, such as debts, medical bills, funeral expenses, and attorney and accountant fees, are deductions. Subtract this figure from the value of your assets. If you still exceed $2,000,000 and die in 2007 or 2008, federal tax may be due from your estate. Whether or not you’ll be required to file a state estate tax return depends on the laws of your state. The same holds true for an inheritance tax return. That’s another good reason to consult an attorney or tax advisor.

Unfortunately, there’s one more tax to add to the mix—income tax. Generally, an inheritance is not income to a beneficiary. He or she doesn’t report inherited assets on his or her Form 1040. The exception is receipt of an IRA (traditional or Roth) or other retirement benefit (such as a 401(k) or profit sharing plan). Unless a retirement account or IRA is rolled over or continued for the lifetime of a beneficiary, any lump sum payout is income to the beneficiary. In other words, if Father Joe leaves his $50,000 IRA to his son Scott, and Scott takes a lump sum distribution, Scott has to pay income tax on this $50,000. Advise your loved ones to talk to their accountants and attorneys before deciding what to do with this type of asset to avoid any unanticipated income tax problems. Read Ed Slott’s Parlay Your IRA into a Family Fortune for some terrific advice on making the most of your retirement assets.

After you die, your executor or personal representative must file your final income tax return. If you die on September 26, for example, an income tax return must be filed on your behalf for all income earned from January 1 through September 26. After that, any income earned by your estate must be reported as income. This requires the filing of a fiduciary income tax return (Form 1041). An estate may use a calendar year or a fiscal year for income tax filing purposes. Because any additional talk about income taxes will put you to sleep, we recommend talking to your tax preparer for more information.

Is there anything you can do to reduce taxes on your death? You bet. There are many options, from establishing trusts, to making gifts during your lifetime, to giving to charities, either during life or at death. See Chapters 14 (“Estate Planning Wishes: Caring for Family, Friends, and Foundations”) and 15 for more information.

Now that you know a thing or two about estate planning and taxes, the next step is to find a knowledgeable attorney to guide you in the estate planning process and to assist you in the preparation of the necessary legal documents. Although we’ve provided you a great deal of important information, it’s best to use a qualified professional to prepare documents tailored to your individual circumstances, assets, and wishes.

Our best suggestion for finding the appropriate person is to ask for a referral from a friend, financial planner, colleague, or other advisor. The word-of-mouth reference from someone who has worked with a particular attorney is invaluable. If this isn’t helpful, we suggest you contact the lawyer referral service of your local or state bar association, which can give you a list of attorneys specializing in estate planning. If you’re worried about cost, check with your local Legal Aid office to see if it can assist you. Another alternative is searching one or more of the following Web sites:

Once you’ve identified a prospective attorney, be sure to ask up front about the hourly fees, the attorney’s expertise and experience, and an approximate time frame for him or her to prepare the necessary documents. Don’t be afraid to ask questions. If you don’t like the responses or don’t receive a response, move to the next name on your list.

Before meeting with your attorney, think twice about whom, if anyone, you want to bring. If you’re married and have children from a previous marriage, for example, you may wish to meet with an attorney without your spouse. Likewise, if your children argue constantly or you intend to treat them differently in your estate planning documents, you’re better off going without them. Also, don’t use an attorney recommended by or already representing these family members. Any perceived conflict of interest could cause problems with your will after you pass away—something everyone wants to avoid.

Yes, lawyers can be expensive, so you may be tempted to create your own estate plan using books or forms that you find on the Internet. We can’t emphasize enough the importance of individualized attention and discussion with a member of the bar specializing in estate planning. An “unofficial” will or a will that isn’t signed with the required formalities can cause even more problems than no will. Christopher Luongo, Esq., Deputy Surrogate of the Morris County Surrogate’s Court, Morristown, New Jersey, agrees:

It’s also important to avoid “bargain basement” estate plans. If an attorney offers you a will for $250, chances are you’re dealing with someone who isn’t well versed in estate planning or who’s simply giving you a form will. It may cost a little more for a tailored estate plan, but it’s money well spent.

The best way to reduce attorney fees is to come to your meeting prepared. The more detailed information you’re able to provide at your initial meeting, the less time your lawyer will have to spend calling to ask additional questions, getting the spelling of names, and so on. So in addition to your full legal name (and any other names you use), address, and social security number, be sure to bring the following:

Last but not least, be candid with your counselor. Tell him or her everything. Hiding information or not being forthcoming will only jeopardize a carefully crafted plan. Don’t be embarrassed. You won’t be the first to share with your attorney that your son has a gambling problem, you had an out-of-wedlock child in high school, or you’re concerned that your daughter will invest her inheritance in her husband’s latest business scheme. Problems can’t be solved unless they’re identified.

We hope that we’ve provided you the information you need to understand the purpose of estate planning and the importance of protecting your assets, both from taxes and the laws of intestacy, and the urgency of preparing the necessary estate planning documents. You have the ability to create the best estate plan for you and your loved ones. Read on for more information on how to do just that.