So you’ve taken that important, and relatively simple, step that’s so easy to put off, and gotten yourself a will.
But if that will has just been sitting in a drawer for a few years, it probably needs updating.
Once you’ve written a will or set up a trust, you should review it annually to make sure it is still effective. Many changes, such as an increase in net worth, the birth of a child or grandchild, or tax-law changes, can affect your plan.
The rapid rise of the stock market over the past decade probably means your investments and retirement accounts have increased your exposure to estate tax. Also, the bequests that would be made under your will today may not be what you intended when you drafted it.
What to do?
The first $650,000 of a person’s estate escapes federal estate tax in 1999, with the amount increasing in steps to $1 million in the year 2006. Amounts in excess of $650,000 are taxed at rates starting at 37 percent and rising to 55 percent.
Because each individual can leave up to $650,000 free of federal estate tax, it’s possible for a married couple to bequeath a combined $1.3 million tax-free to heirs if they plan correctly.
To use two exempt amounts totaling $1.3 million, each spouse should actually own assets worth at least $650,000. Then consider setting up a “bypass trust,” which holds the exempt amount for the surviving spouse during that spouse’s life.
You also may want to make annual gifts to children, grandchildren, or charities of appreciating assets, such as stock or mutual-fund shares. You thus remove from your taxable estate not only the assets’ current value but also all future appreciation.
You can give individuals up to $10,000 a year free of gift tax,
$20,000 when gifts are made jointly.
In the case of a charity, if you give stock that cost you, for example, $100 but is now worth $1,000, you will get a $1,000 tax deduction, and neither you nor the charity will have to pay any capital-gains tax.
In reviewing your will, you may find that the specific dollar amounts you plan to leave heirs is much less than the proportions you intended; therefore, many estate planners suggest using “percentage-specific” rather than dollar-value bequests.
Some things don’t belong in a will. Alexander A. Bove Jr., an estate attorney in Boston, Massachusetts, suggests:
· Don’t mention jointly owned assets, particularly bank accounts. These items normally pass outside the will.
· Don’t mention property you’ve already given away. If you do, you could be setting up your beneficiaries for a nasty dispute.
· Don’t mention specific investments. You could sow major confusion and resentment by transferring specific stocks and bonds to specific beneficiaries. Better to give the stock while you are still alive.