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Estate planning about much more than money, taxes

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Entertainer Art Linkletter was once asked how long he wanted to live. The host of the popular television show, "Kids Say the Darnedest Things," responded by saying he'd like to make it to the year 2010.

He was further queried if that date was significant, was he going to be a hundred years old?

No, he said. He just wanted to die in 2010 because that's the year the federal inheritance tax is repealed.

Like so many laws that deal with taxes, the inheritance rules are overwhelmed by confusion. At the start of the 21st century, Congress approved legislation that annually changed the amount of an estate that is exempted from the so-called "death tax" and reduced the tax rate on the remaining balance.

For instance, this year and next the exclusion is $2 million and the maximum tax rate on the remaining balance of an estate is 45 percent. In 2009, the exclusion goes up to $3.5 million and the maximum tax rate remains the same.

Then comes tax nirvana in 2010, when the entire inheritance law goes away, meaning there is no estate tax whatsoever on assets passed along to beneficiaries.

But, don't blink. One year later the tax goes back to its old settings with only a $1 million exemption and a maximum tax of 50 percent.

Now you know why Art Linkletter wants to die in 2010.

All of this, of course, had led to the creation of a legion of attorneys and planners who counsel people on the best ways to plan and prepare their financial legacies. And, for most families, avoiding some estate taxes is the least of their concerns.

"Without an estate plan, the fates of your assets and your loved ones may be decided by attorneys, government bureaucrats and tax agencies. Taxes and attorney's fees can eat away at your estate, and distribution of your assets could be delayed at a time when your heirs need them most," said Rande Spiegelman, vice president at the Schwab Center for Financial Research.

Estate planning means different things to different people. For some, a simple will can do the job of directing where their assets go. Others may turn to a living trust and other may need something more sophisticated.

True, a will works. It will carry out your wishes after you are gone, but Spiegelman said it comes at quite an expense.

"First, a will must go through probate, which is the legal process used to value your estate, settle any debts, pay taxes and transfer assets to your heirs," he said. "Depending on where you live, probate can be costly and time-consuming, exactly what your family doesn't need when dealing with the loss of a loved one."

Based on California's probate code, the statutory fees used to compensate attorneys and executors in probate cases start at $4,000 on an estate valued at $100,000. The fee ratchets up to $11,000 on an estate valued at $400,000 and $33,000 on a $2 million estate. And, if the attorney and executor are separate people, the costs could be doubled.

"Second, a will is a public document, subject to scrutiny by anyone who wishes to know its content. If someone feels they've been treated unfairly, they can contest the will. Even if they fail to break the will, such challenges can tie up your assets for months or even years, and cost your estate thousands of dollars in legal fees," adds Spiegelman.

Yet, despite these burdens, many people -- especially those who are not high net worth individuals -- are hesitant to make the appropriate move into other tools such as a living trust.

"Estate planning is absolutely about more than money or taxes," said Jacqueline Skay, an Escondido attorney who is a certified specialist in estate planning. "It gets to the very heart of family and other personal relationships, which is also a big reason people put it off. And, if it's not done properly it can destroy families and friendships."

Skay said a living trust can deal with issues that can ruin a legacy if not dealt with in advance.

"With a trust a person can make unique provisions for every beneficiary," he said. "So, if they have a child who is disabled or on public assistance, they can create a special needs subtrust that allows a person to receive distributions without affecting his or her public benefits. If they have a son-in-law that cannot be trusted with money, they can leave their daughter's share in a separate trust for her."

"The point being, if they plan, they get to choose who gets what and when. If they fail to plan, the government has a plan -- a very expensive plan -- which may not in any way fit them," she added.

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