As noted earlier, many aspects of estate planning are dictated by your state of residence. We’ll talk more about this in a bit, but first let’s talk about some basics.

First, what exactly is a will? It’s a document that, as defined in Webster’s New Collegiate Dictionary, is a “legal declaration of a person’s mind as to the manner in which he would have his property or estate disposed of after his death.” Note that the definition says “legal declaration,” not legal document. Although you don’t have to get a lawyer to prepare your will, we suggest that you do. Why? Well, it isn’t to drum up work for our colleagues. It’s because wills are complicated. A will isn’t just a standard form. It needs to be personalized to accurately reflect your wishes on everything from how estate taxes and debts are paid, to the powers of your executor or personal representative, to who takes care of your kids. And the procedure for signing a will to ensure it’s valid—for example, how many witnesses must be present—varies from state to state. If you’re going to the trouble of writing your will, you want to be sure it’s going to be accepted by the courts. While we recommend planning your estate with the help of a knowledgeable lawyer, if cost is an issue and you can’t get help from your local legal aid office, ask an attorney to review any will prepared using computer forms or samples from a stationary shop.

Many wills begin by providing that all of your debts, taxes, and expenses be paid by your estate. Your debts would include medical and credit card bills but would exclude mortgage debt (which would remain with the mortgaged real estate) unless you specify otherwise. Expenses are the costs associated with dying, such as funeral expenses, legal and accounting fees, and probate fees. Estate and inheritance taxes can be treated two ways. You can provide that your estate pay all of the taxes. Alternatively, you can provide that the taxes be split among your beneficiaries on a pro rata basis. Pro rata means that a 25 percent beneficiary pays 25 percent of any taxes and a 5 percent beneficiary pays 5 percent of any taxes. How the taxes are paid can be especially important if some of your assets are passing by beneficiary designation or joint tenancy. These assets pass without regard to your will; however, any taxes due should be paid as you direct in your will. Your attorney or accountant can advise you in deciding what’s best for your particular circumstances.

We talked in Chapter 13 about how certain assets might be owned at your death—for example, joint tenancy assets, individually owned assets, and assets with a beneficiary designation. Now, let’s talk about the different categories of individual assets that you might own: tangible personal property, real property, and intangible property. Tangible personal property is everything you can touch and feel, such as cars, jewelry, sports equipment, paintings, knick-knacks, and furniture. Real property is land and whatever is found on the land, whether it’s a home, warehouse, or crops. Intangible personal property is everything else: stocks, bonds, and cash, for instance.

You may have heard of the term community property. Property obtained during marriage in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) is owned by both the husband and the wife, each spouse owning “an undivided one-half interest” in the entire asset. In Alaska, you can elect that your property be treated as community property. At death, the surviving spouse receives one-half of the community property; the spouse who has died may dispose of his or her share by will.

When you’re writing your will, be sure to remember your personal possessions. If we’ve learned one thing over the years, it’s that dividing the personal property of a recently departed loved one can be a tinderbox of emotion. Some of the worst family disagreements are about the “stuff”—the silver, the photographs, and the old chipped mugs—that belonged to a beloved relative. Abigail, age 42, has vivid memories of hurt feelings and family unrest when her grandmother’s will failed to address family “heirlooms,” especially since there were supposedly many verbal promises of who was to receive what piece of jewelry.

So what do you do? First, don’t make oral promises. This will help prevent “he said/she said” arguments. Second, make a written list, and be specific! The list should be in your own handwriting. Fully describe each item (for example, instead of writing “my ring,” write “my ring with two sapphires and one diamond set in platinum”) and the full name of the person to receive it. Our beloved (and very organized!) Aunt Mary left handwritten tags attached to jewelry and other heirlooms with the full name of the individual to receive each precious item. The items you list, however, don’t have to be worth a lot of money. Sentimental value counts, too. We’ve seen knock-down drag out fights over Beanie Babies. A great deal of emotion can be attached to certain possessions, so the more direction you provide, the less conflict there should be. As the workbook titled Who Gets Grandma’s Yellow Pie Plate notes,

In some states, your will may make reference to a memorandum you leave regarding your personal property. Check with your attorney to be sure any list you leave will be effective, and if not, ask that your list be added to your will. Be sure that language is included stating that any disputes are to be resolved by your executor or personal representative.

Some individuals take the opportunity to give special belongings to loved ones while they’re still alive, especially if they’re not using them anymore. This has two benefits. First, you can watch your loved one enjoy the item while you’re alive. Second, there’s less to fight about after you’ve passed. And if you think it’s something no one wants, get rid of it! Believe us, no one needs 40 empty mayonnaise jars. Or even better, join the eBay craze and sell your stuff online or at a garage sale. You’ll have some fun and might just make a few dollars. Leaving a house full of junk that needs to be cleaned up puts an even greater burden on the shoulders of your loved ones. Just ask Stephanie, age 42, who filled five three-ton dumpsters with junk when she emptied her mother’s house.

With that said, we’ll also admit that we each have basements full of, well, stuff, that we keep saying we’re going to clean out but never do. It’s because we simply can’t face such an overwhelming task. So we’ve learned to make the chore manageable. Instead of saying that we have to clean out the whole basement, we create mini-tasks. For example, this week we’ll sift through two shelves of old magazines or take one pile of clothes to goodwill. We don’t expect you to jump up after reading this and run to clean out your closets. But we do hope you’ll think about how your actions will help your heirs. And hey, as we noted earlier, if you can make a few bucks by selling your stuff, that should be incentive enough!

Now that we’ve taken care of your personal possessions, let’s move on to the rest of your estate. Before you decide who receives the majority of your assets, you may want to leave some small or specific gifts to individuals or charities. These are referred to as either specific bequests or specific devises. For example, you may want to leave $1,000 to your church, synagogue, or mosque or $10,000 to your college or university. Some individuals choose to leave small remembrances to younger relatives—let’s say, $500 to each grandchild. There is no dollar amount limit or requirement that a bequest or devise be made in cash. For instance, vacant land may be left to a land conservancy charity or shares of a particular stock to a sister. Bequests and devises provide an opportunity to remember an individual or organization, but they are not required.

After all expenses, debts, and taxes are paid, your personal property distributed, and any specific bequests or devises made, what’s left is your residuary estate—in other words, all your other possessions. Unless you leave your real estate to a specific individual as a devise, it becomes part of your residuary estate. This is where the planning comes in.

The planning part of your will begins with whom you want to receive your residuary estate. It can be one person or charity, many people or many charities, or some combination. Most married folks leave their estates to their spouse, or if their spouse isn’t alive, to their children. If you have several children, you can decide whether your estate gets divided among your children who are living (per capita) or, if a child has died, whether his or her share will pass to his or her children (per stirpes). See the following sidebar for information on these legal terms. If you don’t have children and aren’t married, you can name your siblings or maybe nieces and nephews. Perhaps you have a partner whom you want to benefit from your estate.

The way you divide your estate is up to you. It can be in equal shares or by percentages. Try to avoid using dollar amounts because some inequity can result depending on changes in the size of your estate at your death. Once you’ve determined who you want your beneficiaries to be and how much you want them to receive, the next decision is how they receive the funds.

If your beneficiary is an adult, you may want him or her to receive a share of your estate outright—in other words, with no strings attached. Or maybe you prefer someone’s inheritance to be held in trust. Married individuals usually choose to leave their estates outright to their significant other. However, this might not be the best plan for two reasons.

Let’s say that you have children from a prior marriage or relationship. If you leave everything to your current spouse, your children could end up empty handed after your spouse dies. Of course, your spouse may promise to provide for your children. But that’s an unenforceable promise. And although he or she might have the best intentions, countless things could happen to those funds (such as bankruptcy or poor investments). In this situation, we would suggest placing the funds into a trust for your spouse’s benefit. Your spouse would receive the income from the trust plus additional funds if he or she is sick or needs additional support. Later, when your spouse dies, the remaining trust assets would be distributed to your children (or whomever you want). A trust for a spouse allows you to take care of your better half but still provide for your family.

Tax planning is another reason that you might want to consider a trust for a spouse. Under current federal law, we all have a certain amount that we can pass to anyone free of federal estate tax ($2,000,000 in 2007). There is an unlimited deduction for assets passing to a spouse (unless your spouse isn’t a U.S. citizen). If you give all of your money to your spouse when you die, there will be no taxes at your death. However, the amount you can pass tax free to other loved ones has been lost. Here’s an example. You and your spouse each have $2,000,000. You die and leave your spouse all of your assets. Your spouse now has $4,000,000. When your spouse dies, he or she has an estate valued at $4,000,000 but can only pass $2,000,000 free of federal estate tax. The result—lots of taxes. If you had left your $2,000,000 in a trust for your significant other, it wouldn’t be included in his or her estate and together you would have passed $4,000,000 tax free to your heirs. No taxes versus lots of tax. We know what we’d choose.

Your plan doesn’t have to be all outright or all in trust. You can create a customized plan with some assets passing outright and some being held in trust. A trust can be for life or a term of years. There are countless creative options. Talk to your counselor for ideas.

As we noted earlier, money you leave to a spouse who isn’t a U.S. citizen doesn’t qualify for the unlimited marital deduction. However, there is an option to avoid federal estate tax on funds you leave to your non-U.S. spouse. It’s called a qualified domestic trust. This type of trust, which requires a U.S. citizen or bank to serve as trustee, provides income to your spouse for his or her lifetime. Any principal distributions of the trust assets, though, could be subject to tax.

Because the tax laws are changing, many practitioners now suggest that a married couple consider “disclaimer” wills. With a disclaimer will, you leave everything to your spouse, outright and free from trust. However, when you pass away, your spouse can sign a disclaimer that results in a trust being created for his or her benefit. Why do this? It allows your spouse to evaluate the current tax laws, his or her health, and the value of your assets at the time you die. Bottom line: It’s a flexible plan that may be worth considering.

We strongly suggest that you establish trusts for underage children to provide for their education and care while they’re young. If you’re leaving significant funds, you may want to require that the money remain in trust until your kids reach certain ages, with principal distributions at ages such as 25, 30, and 35. Maybe you have a beneficiary who is disabled. In that event, we urge you to consult an attorney specializing in estate and disability planning. Or maybe you have a son-in-law who you don’t trust and want to protect your daughter’s inheritance. If you place the funds in trust for her benefit, your son-in-law will be unable to access the funds. There is much that can be done to protect your loved ones.

Some individuals try to exert what’s called dead hand control by including certain contingencies in a will or trust. For example, we’ve read wills that require a beneficiary to attend a particular college or marry into a certain religious faith before receiving a bequest. One trust stated that a beneficiary would not receive trust income if he engaged in “conduct unbecoming a gentleman.” We think this may be going a bit too far. We also advise against using your will as a weapon. We’re talking about making promises of inheritances in return for certain behavior or a threat to “cut someone out of your will” if he or she does something you don’t like. These actions are not only emotionally destructive to your beneficiary; but they can also be grounds for litigation after you’ve died.

Remember, you can always exclude an individual from receiving benefits under your will. If you want to exclude a particular person, we recommend specifically mentioning this in your will. Include a statement that says something like, “I specifically exclude my grandson, Gordon Golddigger, from my will and intend that he receive no benefit from my estate in any manner.” This way, Mr. Golddigger can’t argue that he was mistakenly omitted from the will. There may be a temptation for some to exclude a spouse from receiving under the will. In many states, a spouse is entitled to an automatic elective share under the will if he or she is omitted. Talk to your attorney—there may be a better option for you.

Because it’s part of our job to cover every possible eventuality, we also suggest including a so-called common disaster clause in the unlikely event that all of your beneficiaries die before or at the same time as you. We don’t mean to make light of such tragedies, but we often refer to this as the family vacation plane crash. Although such a scenario is unlikely, you still need to plan for it. Many of our clients pick nieces or nephews to receive their assets in this case. Others pick charitable organizations. If you don’t make a provision for this scenario, the laws of intestacy will apply.

Once you’ve determined how to distribute your estate, you need to decide who will administer it. This is your executor or personal representative. The job of an executor is usually completed within a year or two. Your executor can be a family member or friend. It can be a financial institution with trust powers. Or it can be a combination of the two. An executor is entitled to commissions, which are usually at a rate defined by your state’s law. If you pick a financial institution, you may be able to negotiate a different rate.

The job of a trustee can last much longer, especially if you have young beneficiaries. The trustee manages the trust, much like a small business, as long as it lasts. If the trustee is given a great deal of discretion, you’ll want someone who understands your intentions and goals. In this circumstance, you should consider the age and health of the individual or individuals that you name. And be sure to include a provision for successors. If you’re establishing a trust for your spouse, you may want him or her to serve with another individual or a bank or trust company.

When selecting your executor and trustee, you don’t need to pick a financial genius. You also don’t have to select someone who lives locally. If you’ve decided on an individual, we suggest selecting someone who is prudent enough to ask for help from lawyers, accountants, and financial planners. Consider your circumstances. Is there likely to be a fight or animosity among your beneficiaries? Do your children hate their stepmother? If that’s the case, you may want a neutral financial institution or third party to serve. In selecting a financial institution, Joseph Gazdalski, vice president of the Glenmede Trust Company of Philadelphia, recommends that you look for the following:

If your attorney suggests that he or she serve as your executor or trustee, look elsewhere. We believe that it’s a conflict of interest for your counselor to serve as your fiduciary (unless, of course, you ask this person to serve or he or she is a close personal friend or family member).

For many people, the hardest part of writing a will is naming a guardian for their young children. It’s an emotional and extraordinarily difficult decision. But it’s also one of the most important reasons to have a will. You may love your parents or siblings but not want them to raise your kids. Or maybe you want to head off what you anticipate would be a battle among the grandparents if something happened to both you and your spouse. Not only should you select a guardian, but you should also select one or two successor guardians. In selecting the guardian, we usually advise against naming a married couple. If you want your sister and brother-in-law to serve as guardians, only name your sister in the event they divorce. Or include language in your will that specifies your sister will serve as guardian if she and her husband split up. A guardian can only be named in your will.

In addition to naming a guardian, many individuals include language in their will discussing their hopes for their children. We’ve seen language requiring that children be allowed to visit with other relatives, or requesting that the appointed guardian travel with the children to a favorite destination, or encouraging the guardian to arrange for particular educational opportunities. Alternatively, you can prepare a Letter of Guidance to be presented to a guardian in the event of your death.

We understand how difficult it is to select a guardian. However, not selecting someone would be worse if your families end up fighting, forcing a court to decide who should be your child’s guardian. So make your decision, and put it in writing.

The rest of a will generally contains the powers of your executor and trustee and a lot of boilerplate legalese. There’s often a provision stating that you don’t want there to be a public accounting of your estate. This keeps things private. Review these provisions carefully, and make sure they’re satisfactory.

You should only sign one original will, not multiple copies. Your will should include a statement revoking all prior wills. Once your will is signed, do not write on it or make notes on the original. Likewise, don’t unbind the original or remove the staples. Your will should be kept in a safe spot, perhaps with the attorney who drafted it or in a firebox in your home. Make sure your loved ones know where the original is. If you have an old will, revoke it by ripping it up, burning it, or writing “Revoked” across the front.

Think about the word trust. The dictionary defines it as “assured reliance on the character, ability, strength, or truth of someone or something.” When you create a trust, that’s exactly what you’re doing: placing your assets with someone or some institution that you can trust to safeguard them, either for yourself or another.

As we mentioned previously, there are two general types of trusts: a trust created during your lifetime (an inter vivos trust) and a trust established at your death (a testamentary trust). We also talked about some of the different trusts you might create under your will for a spouse or children.

So what kind of trust might you set up while you’re still alive? As we explained in Chapter 13, in some states probate can be a nightmare. To avoid it, residents are advised to set up trusts during their lifetimes. Such a trust is often called a Living Trust, a grantor trust, or a revocable trust. It provides that, as long as you’re living, you receive all of the income and as much of the principal, or corpus, of the trust as you want or need. The trust is revocable, so you can change or terminate it at any time. You can be the trustee of your Living Trust. We like to think of a Living Trust as simply a different name for your assets. Instead of the assets being owned by you, the assets are now owned by your trust. Nothing has really changed, except the way the assets are titled.

When you die, your Living Trust becomes irrevocable. Your successor trustee then follows the terms of your trust, which outlines how to distribute your assets. This includes provisions like those found in a will. For example, you can provide for several small gifts to be made to family members, friends, or your favorite charities. You then provide for the division of the remainder of your trust assets. You can also establish trusts for beneficiaries. Unlike a will, a Living Trust does not require probate. There’s no need to prove it’s valid because you take care of that while you’re alive. In other words, your Living Trust becomes your will with the added benefit of avoiding probate.

Your estate planning isn’t limited to providing for your loved ones at death. You can set up trusts today and make contributions to them during your life. One popular trust is for a child or grandchild, perhaps to pay for college. There are also trusts for disabled individuals, which provide benefits to a disabled person without jeopardizing his or her government benefits. We see trusts established to own real estate or other specific assets. There are charitable trusts, asset protection trusts, insurance trusts, personal residence trusts, and many other options. Converse with your counselor to see if you should consider one of them.

Volumes have been written about all the other estate planning tools that are available to direct your estate and to save on potential taxes. A detailed discussion of these mechanisms is beyond the scope of this book, but we’ll give you a quick overview.

When you think of life insurance, we bet you only think about the group life policy you get through work or a simple term policy. You know, the 20-year term policy you buy in case you die when your kids are young? Well, life insurance has grown up. There are myriad ways to use life insurance not only as an investment opportunity but also as an estate planning tool. A joint and survivor life insurance policy insures two individuals, usually a married couple, and pays out on the second death. This reduces the cost of the policy. Of course, because insurance is an estate asset if the insured owns and controls it, the policy should be owned by an irrevocable life insurance trust or someone else, such as your kids, to avoid additional taxes that might be due on your passing. Ronald J. Greenberg of the Greenberg and Rapp Financial Group, Inc., recommends talking with a financial professional for a review of your current insurance situation. To find a credentialed professional in your area, go to http://financialpro.org.

If you own a small business, planning for your death is especially critical. You need to be concerned about who will take the reins when you die (succession planning), as well as the transfer of your interest in the business. Perhaps you have a partner who will want to buy your share or a key employee who should be given the opportunity. A buy/sell agreement is one of the documents to consider.

Earlier in this chapter, we talked about giving away personal belongings while you’re still alive. The same holds true for money and other assets. Under current law, every year you can give $12,000 per person to as many people as you want without paying a gift tax. (This is called the annual exclusion from gift tax and is indexed annually for inflation.) The gift isn’t considered income to the recipient, either. If you’re married and your better half agrees, you can double that amount to $24,000. The gift can be in cash or other property. (Check with your accountant, though—there could be capital gains tax ramifications to giving away securities and other assets.) You can make gifts outright or in trust. There are Section 529 plans (tax-deferred savings available in some states) to save for education as well as other custodial accounts for minors.

Of course, you can also make gifts in excess of the $12,000 annual exclusion from gift tax. Any amount you give in excess of $12,000 is considered a taxable gift. Although gifts in excess of this amount are taxable, you don’t actually have to pay a gift tax. As of 2007, you can make gifts of up to $1,000,000 during your lifetime without having to write a check to the IRS. How does this work? Well, the total taxable gifts that you make during your life reduce the exclusion from federal estate tax available at your death. We’ll give you an example. You make a $112,000 gift to your favorite nephew Ned in 2007. The annual exclusion amount of the gift is $12,000, making the taxable gift $100,000. If you die in 2007, you no longer have $2,000,000 that you can pass tax free—you have $1,900,000. There is no cap on payments of tuition made directly to an educational institution or medical payments made directly to a provider. For some, gifting during life is better. Your loved ones can use the funds now, and you can remove potentially appreciable assets from your estate.

Finally, the charitable giving options discussed in Chapter 14, “Estate Planning Wishes: Caring for Family, Friends, and Foundations,” are wonderful for estate planning. Not only does charitable giving benefit others, but it also has the possibility of reducing death taxes on your passing.

In Chapter 9, “Medical-Legal Wills: Directives, Definitions, and Discussions,” we discussed at length the importance of having a Power of Attorney, Health Care or Medical Proxy, and Living Will. If you haven’t already signed these documents, discuss them with your lawyer when you’re reviewing your estate planning.

Once you’ve signed your documents, we recommend reviewing your plan at least every five years, or after any major life events, such as deaths, divorces, marriages, or births, or if you have a significant change in your assets. We also suggest that you keep your documents in a safe place, such as a readily accessible firebox. This protects your invaluable documents not only in the event of fire, but should you have to evacuate quickly, you’ll only have a single box to grab in case you have to run for cover!

We recognize that we’ve provided you with a great deal of information in this section. Think of the information as tools to help you create an estate plan customized to your wants, wishes, and wills. Use these tools as you consult with your advisors. Together, you can build the perfect plan for you and your loved ones.