Estate law

Trusts aren’t just for the wealthy. Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.

Discussing your estate plans with your heirs may prevent disputes or confusion. Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you’re gone.

The federal estate tax exemption – the amount you may leave to heirs free of federal tax – has been rising gradually and will hit $3.5 million in 2009. Meanwhile, the top estate tax rate is coming down. The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.

You may leave an unlimited amount of money to your spouse tax-free, but this isn’t always the best tactic. By leaving all your assets to your spouse, you don’t use your estate tax exemption and instead increase your surviving spouse’s taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse’s death.

There are a few easy ways to give gifts tax-free and reduce your estate. You may give up to $13,000 a year to an individual (or $26,000 if you’re married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred. 529 plans are also a great way to gift money to future generations for higher education. One can gift $65,000 once every five (5) years (or $13,000 per year) into a child’s 529 college savings plan.

There are ways to give charitable gifts that keep on giving. If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.