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A To-Do List for Estate Planning

Get ready for possible changes in 2013

Three generations looking at family photos - what you can do to prepare a solid estate.

Take the time to review your options before estate tax rates change in 2013. — LWA/Getty Images

In recent years, Congress hasn't made estate planning any easier with its ping-pong approach to the estate tax.

The first — and most vexing — thing you need to know is that federal estate tax rates are slated to change again in 2013, unless Congress decides otherwise. That's little comfort for estate planners, who in recent years have been whipsawed by a federal rate that changed annually, going to zero in 2010 and then moving upward again this year.

See also: Contesting a will.

Yet there's much you can do to streamline one of the most difficult financial planning decisions of your life. If you break things down into pieces, estate planning becomes a lot less intimidating.

The good news is that until Jan. 1, 2013, the amount of your estate exempted from federal tax is $5 million for individuals, $10 million for couples. You can also make up to $5 million in gifts ($10 million per couple) before paying a gift tax.

Who can say what will come with 2013? But at the very least you should start reviewing your options now to determine the best tax strategy for you.

Here are some essentials to consider:

  • Professional advice. Find a qualified estate planning professional who will listen to you and craft a plan that works for you and your family. That's the best assurance that your intentions will be honored.
  • Health care power of attorney. Before you make the big decisions about who will get your estate, you need to make other choices about who will represent your interests with the doctors if you become incapacitated. You do this with a health care power of attorney. You also need a living will, which tells medical staff what to do in the event you're placed on life support.
  • Financial power of attorney. This document is similar to a health care power of attorney, only it appoints someone to handle your financial affairs. This person should not only be trustworthy, but also understand something about finance or investing. This document may also be called a "property" power of attorney.
  • Wills and trusts. Wills are essential, simple documents that everyone should have. Trusts can be drafted in addition to wills and serve more complex estate-planning needs. Property and other assets can be placed in the trust to shield them from taxes and from probate, the lengthy and expensive court process by which wills are executed. Instead, a trustee is appointed to manage the trust. That will simplify things once you or your spouse die.
  • Gifts that can reduce your estate. Although the gift-tax exemption may change in 2013, couples can for now give away up to $10 million without paying federal gift tax. Talk to your estate planner about how gifts might reduce the value of your estate, and therefore the tax paid on it.

    "This is for extra money you don't need to live on," says Rial Moulton, an attorney and financial planner with Retirement and Tax Planning Specialists in Spokane, Wash. "Now is a window of opportunity to get chunks of assets out of your estate."

Next: Donating money from your estate. >>

  • Charitable giving. There are any number of ways to donate money from your estate. These should be discussed with your estate planner. The simplest is a "qualified charitable distribution" from your Individual Retirement Account (IRA). You can earmark up to $100,000 a year (your spouse can do the same) for a charity from your IRA. If you're at least 70 1/2, that amount would be excluded from federal income tax.
  • Updating old documents. If you've had an estate plan in place for years, review it. Make sure that you've designated your beneficiaries and trustees and that you've signed the proper documents to give people you trust access to medical decision making.

    Under current medical privacy law, notes Sid Blum, a certified financial planner with Greatlight Fee Only Advisors in Evanston, Ill., people who want to get information about your medical condition or discuss it with doctors must be cleared by you in advance. There has got to be a document on file with your health care providers that includes their names.
  • Integration. Integrate your estate plan with tax planning across your entire portfolio.

    Will your estate be subject to capital gains or state inheritance taxes? Every state is different and requires another level of review.

    Would you like to leave money that won't be subject to estate tax? Various insurance-based products and trusts may allow you to do that. Even family partnerships can be considered.

    Work with a noncommission, fee-only financial or estate planner when considering insurance products — broker-sold products are frequently oversold and can be bad choices for retirees.

Also of interest: AARP Foundation Gift Planning. >>

John F. Wasik is a personal finance columnist for Reuters and the author of The Cul-de-Sac Syndrome and 12 other books.

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