Estate planning for family security.

Estate planning is an essential part of your financial plan. It allows you to provide financial security for your family after your death. You can decide how your property is to be divided among your heirs and who the legal guardians of your children should be, not the state.

Many women die intestate--without a will. Many feel they don't own enough assets to justify a will. Everyone has some property they must dispose of. You probably own a lot more than you think.

Dying Without A Will

If you die intestate without a will, your state has special laws called the "laws of intestacy" that control how your property (real estate, checking, savings account, stocks and bonds, and personal assets) are divided up. If you have young children, the state will also determine who their guardians will be.

The size of your taxable estate is based on the current market value of the property held in your name, your share of property you own jointly with someone else, the death benefit of your life insurance policy and assets you have in a revocable living trust. If the combination of these assets exceeds $600,000, your heirs will have to pay federal estate taxes. When you combine your house, life insurance, retirement plan at work, car and other personal belongings it isn't hard to reach $600,000.

The first dollar over $600,000 is taxed at 37%, anything over $3 million is taxed at 55%. Depending upon the size of your estate, the government can take a huge chunk of your assets from your heirs, which is why it is necessary for you to have an estate plan. With proper planning you can reduce or eliminate taxes leaving more money to your family.

The first step in putting together your estate plan is to make an inventory of the assets that form your estate and determine their value. (See worksheet, "Estimating The Size Of Your Estate.") List everything you own, including such items as real estate, stocks and bonds, equity in a business, jewelry, furniture, cars, and your checking and savings account. Also list money you may have in an IRA, company pension and profit sharing plan, and the value of all life insurance policies.

Your first priority is to make sure that your survivors will have enough money to cover their basic needs. An emergency cash reserve fund can take care of the living expenses for a few months in case your life insurance death benefits are delayed. You need to carry enough life insurance to cover your family's living expenses, estate taxes, and the cost of probate. Probate (to be discussed later) can take six months to two years and cost 10% of your estate.

Before you draw up a will, you need to select someone to act as your executor. This person is responsible for paying your taxes and debts, getting your assets appraised and distributing your property to your heirs and beneficiaries. If your estate is less than $600,000, you can ask your spouse, another relative or your adult child. Your estate can then save having to pay an executor fee which can range from $4,000 to $20,000 depending upon the size of your estate.

If you are a parent you need to ask someone to become the guardian of any minor children (those under 18 in most states), in case you and your spouse die at the same time. Seek an individual who shares similar philosophies in raising your children and has the time to take care of yours. It is not always recommended to select the grandparents because of their age. They might not live long enough to complete the job. It is also a good idea to select alternate guardians in case of an unforeseen problem.

If you are the parent of a disabled child who will need a guardian for life, you will need a different type of estate plan. Any money left to him or her could make them ineligible for Medicaid, which pays medical bills for the needy. Instead you can leave extra money to another child who agrees to take care of the disabled child. Or you could invest in an annuity that will provide regular payments to them.

There is also a special trust called the family sprinkle that provides benefits for family members without affecting the Medicaid eligibility. Discuss this with your family attorney.

The guardians you select will be responsible for the children as well as their money and property. You should select someone who knows how to handle both. If you are unable to find someone who meets both qualifications, you can select two guardians, one to take care of the children, the other to manage their money, possibly a financial institution.

Your Will

Regardless of your age or the amount of assets you have, you need a will. The purpose of a will is to make sure that your property goes to those you want it to go to, rather than to the people you state chooses under the intestacy laws.

With a will there are a number of instructions you can leave regarding your property. You are allowed to leave various amounts of money and property to whomever you choose. According to the laws of intestacy, your spouse is not entitled to the complete estate. If you want your spouse to inherit everything as most people do, then you must specify these instructions in your will.

Benefits Of A Will

* With a will you can give specific items to specific people. If you have a special ring you would like to leave to your niece, this is where you would do it.

* You can provide your funeral and burial instructions.

* You can name the executor of your estate.

* You can donate your body to a foundation or university for research.

* You can name the guardian for your minor children.

* You can give specific instructions on dividing your personal property.

There are two types of wills: witnessed and holographic. A witnessed will requires you to have two adults witness the signing of your will. This type of will is recognized by most states. A holographic will is one you write by hand and sign without witnesses. Few states accept holographic wills. Your probate court can tell you whether your estate allows holographic wills.

Divorced Parents

In many states a divorce will revoke your will. You should make a new will as soon as you separate and be sure to include your children. Your divorce decree can require that your ex-spouse maintains a will and make provision for the children. You can also require that your ex-spouse set up a trust or keep the insurance in force with the children as the beneficiaries. If you don't trust your ex-spouse, have the insurance transferred to you and pay the premium yourself.

Do I Need An Attorney To Draft My Will?

Recently there has been an influx of "do it yourself" legal guidebooks in the bookstores for people who want to save legal fees. If you are a newcomer to the financial arena, it is recommended that you hire a good estate planning attorney. She can advise you on your state's laws and avoid costly problems that you might create by making your own will.

The cost of a will can vary from $100 for a simple document to $1,000 for a more complex estate. Complications mean extra work for your attorney who usually bills by the hour. You can save yourself money by supplying her with a list of your assets, the name of your executor, guardian for your children and instructions on how you want your estate to be distributed. Have your attorney keep the original signed copies of your will in her safe. Keep copies for yourself in your home files.

Reviewing And Updating Your Will

It is important that you keep your will current. You should review it whenever there is a major change in your life, such as a marriage, divorce, birth or a death in your family. You should also review it if there has been a substantial change in the value of your assets such as the addition of a large amount of money or property, or a change in the tax laws. If there are no changes, you should still review your will every year or so to make certain it still says what you want it to say.

If you need to make a change do not mark on the original. It is not legal and can invalidate your will. Contact your attorney who will write an amendment called a "codicil," or if need be write a new will.

Probate--What Is It?

When you die, whether with a will or not, there are administrative procedures that must be completed with your estate. Someone must pay your taxes, debts and funeral expenses and supervise the distribution of your assets to your beneficiaries or heirs. It is the responsibility of the probate court to administer your estate and to make sure that the instructions left by you in your will are properly executed.

Some of the probate procedures include transferring the title of property held in your name into the name of someone else. And filing the federal and state tax forms which are required by law.

Property That Avoids Probate

Not all property in your estate needs to be probated. Property that is excluded includes that held in joint tenancy with right of survivorship, or tenancy by the entirety, your spouse's one half of the community property, property held in a living trust and life insurance and retirement plan proceeds. Property held in single name only or any share of property you hold with other persons may need to be probated.

Personal property such as furniture and clothing which has no recorded title can usually be settled by the family rather than by probate court. If the property has a recorded title such as a car, house or land, probate is needed to transfer title into the names of your beneficiaries or heirs.

Small Estates

If you have an estate with assets of less than $30,000, many states have a small estates department which will take care of the administrative task. An executor or an attorney is generally not needed. Your state's probate court can tell you whether there is any charge for their service.

Advantages And Disadvantages of Probate

The advantages of probate are:

* Court supervision: Everyone receives what they are entitled to according to your will or under the laws of the state.

* Once the estate is probated and its assets are distributed, creditors cannot make claim against the assets.

* Probate clears titled property out of your name into the name of your beneficiaries or heirs.

Disadvantages include:

* Probate is expensive: the fees are set by law and vary from state to state. It may be a fixed or sliding percentage of your probate estate. A good "ballpark" figure is 5% of your estate.

* Probate is very time consuming. It takes at least a year to probate a simple estate and longer if it is more complex. The average probate time is one and a half years. During this time your heirs and beneficiaries cannot touch the assets.

* With probate your estate becomes public record. The general public and unknown creditors can obtain a copy of your will and other papers to review and make claims against your estate.

The disadvantages far outweigh the advantages and therefore it is highly recommended that you avoid probate.

How to Avoid Probate

The best method to avoid probate is by establishing an estate planning tool called the living trust, which is written while you are alive and it allows your property to avoid probate and pass directly to the person you named in the trust agreement.

The two types of living trust are: revocable and irrevocable. A revocable living trust lets you receive the income from the trust while you are alive and upon your death the property passes to the trust's beneficiaries without going through probate. You can revoke the trust and take back the property at any time while you are alive.

An irrevocable trust cannot be altered or revoked. You cannot take back the property or receive any interest money. Essentially, you are making a gift to the person you name in the agreement. Because of this provision, you may not be taxed on its income during your life and you may not have to pay federal and inheritance taxes.

All types of property from personal belongings to real property can be placed into a trust. To determine whether you need a trust and what type is best for you, consult with your estate planning attorney. Expect to pay $800 or more for the drafting of a trust.

The second way to avoid probate is by having property held in joint tenancy or tenancy by the entirety. The advantages are that it is easy to arrange and at the death of all joint tenants but the last one, the property immediately passes to the remaining tenant without going through probate. The disadvantage of joint tenancy is that property can land in the hands of beneficiaries you may not want, particularly if there is a second marriage and stepchildren are involved. Discuss this further with your attorney, financial planner or tax adviser.

Taxes: Federal And State Inheritance

* Federal estate tax--Estate taxes are the most expensive taxes you will ever have to pay. The federal estate tax has graduated rates ranging from 40%-55%. The more you have the higher the tax rate. This is money you have earned and should be passed on to your heirs instead of to the federal government.

If you are married, the federal government currently allows you to leave your spouse all of your property tax-free. There isn't a dollar limit on the size of the assets. If you leave property to anyone other than your spouse, such as your children, there is a tax-free limit of $600,000.

There are a number of methods you can use to reduce your federal estate taxes: The marital deduction, using a bypass trust, making a gift of up to $10,000 to each child or anyone else you desire every year, and giving away your life insurance by placing the proceeds into a trust. This area of discussion is much more complicated and the tax laws on federal estate taxes are always changing. Before you make any changes in your will or financial plan, consult with a professional tax adviser.

* State Inheritance Tax--The state inheritance tax is usually a lot less than the federal estate tax. Each state is different and bases the amount you owe individually. There isn't a $600,000 exemption as under the federal estate tax. Each beneficiary receives a separate exemption. To find out more information on the state inheritance tax in your area, contact your attorney or call your state's department of taxation.

Putting It All Together

Estate planning is an important part of your wealth building and preserving program. Its primary purpose is to pass your wealth on to your heirs while reducing the tax liabilities and saving them the burden of making wrong decisions after your death. Consult with an estate planning attorney today to draft a will and to discuss the estate saving strategies outlined in this chapter.

About The Book

While The Black Woman's Guide To Financial Independence: Money Management Strategies For The 1990s is aimed at providing "sound, up-to-date, workable solutions to financial problems that will empower black women during the 1990s and beyond," it can be sage financial planning advice for all African-Americans--and, for that matter, all women, regardless of race. Author Cheryl Broussard uses easy-to-understand language to lay out the basic fundamentals of sound spending, saving and investment strategies. The book is filled with worksheets and tables designed to help the reader define her financial position and take appropriate steps to improve it.

In addition to estate planning, The Black Woman's Guide To Financial Independence covers the following topics:

* Setting personal financial goals.

* Controlling and reducing debt.

* Surviving financially after a divorce.

* Tax planning.

* Learning to invest in stocks and mutual funds.

* Teaching your children about money.

* Paying for your children's college education.

* Buying your first home.

* Retirement planning.

* Insurance planning.

The book also provides sources of other useful information related to money management and personal investing.