Estate planning

Estate planning

NOTE: As of 2014, many of these numbers (ex. $600,000) have changed dramatically.

Finally, I want to spend a few minutes on estate planning. If you've managed to save and invest wisely over the years, the government may reward your efforts with large estate taxes.

The first and most important part of estate planning is simple : draw up your will. Unfortunately, two-thirds of Americans haven't done this. But if you don't have a will, your state's laws determine how your assets will be distributed. Even though these laws may be based on common sense, your wishes probably will differ from the state's plans.

So draw up a will even if you have to use preprinted stationary or a computer program. It probably will be better than letting the state decide things for you. Just make sure your will is properly signed and witnessed.

The majority of people won't have to worry about federal estate taxes because everyone currently can pass $600,000 in property to their beneficiaries.

However since things like your home and life insurance in your name are counted in your estate, it's not that hard for upper-middle class people to bump into that $600,000 floor. And if you bump into the floor, you'd better watch out.

Estate taxes start at 37 percent of the amount over $600,000 and reach 55 percent for amounts over $3 million. You can pass an unlimited amount of money to your spouse without paying any taxes, but when your spouse dies everything he or she owns above that $600,000 limit is taxed.

Fortunately, there are a few easy ways to reduce your potential estate tax liability. You can give lots to charity, or you can start making annual tax-free gifts of $10,000 to your children or other relatives and friends. If you're married you also can use a so-called bypass trust to effectively double the amount of your estate that won't be subject to taxation to $1.2 million.

However, when it comes to non-recurring events like estate planning, you probably should see a lawyer or tax expert to make sure you're doing things correctly. Congress always talks about changing the aforementioned $600,000 exemption amount, and if you goof things up your heirs could lose tens of thousands of dollars.