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When President Obama signed into effect the latest tax law raising the amount of an individual's assets that are exempt from the federal estate tax to $5 million, many people thought that marked the end of need for estate planning? After all, how many Americans have a net worth of more than $10 million? Probably not you.
An estate tax is similar to an inheritance tax and is based on the taxable value of a decedent's estate. In the most basic terms an estate is the total of what you owned and owed at the time of your death. The last 30 years has seen the amount that a person could transfer without incurring an estate tax rise from $600,000 to everything before settling in at five million dollars for the tax years 2011 and 2012. Certainly when the exemption was in the area of one million dollars more people were impacted. After all, that included a home and retirement plans and even life insurance - so the sum was not out of reach of many. Now, at least through 2012 it is beyond what the vast majority will accumulate.
However, that does not mean that people of lesser means should not do any planning. A major part of estate planning is simply making sure that documents are prepared that will serve you at the time of your death, illness or periods of incapacity. These documents include your last will and testament, power of attorney and health care proxy.
The will represents your instructions on how assets should be distributed after your death, who should care for minor children if any, and who you want to designate to be in charge of the process.
The power of attorney document will appoint someone to act for you when you are alive but unable to represent yourself. The reasons could range from being out of town, being in the hospital or simply not wishing to. Great care should be given to naming your representative and defining the powers that you are granting with this document.
The health care proxy or living will discusses who can receive medical information about you and who can make medical decisions for you. While it may be disheartening to address these issues while you are healthy and functioning imagine how stressful it would be if you were unable to make the decisions and your loved ones would have to fight among themselves to reach a conclusion?
The point is that estate planning does not revolve around the amount of a person's assets but around their very being and while less than 1 percent may have a tax issue, we all have a need for these three documents.
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- Investing Education
- federal estate tax
- estate planning