BOULDER, Colo. -- The adage remains true: You can't take it with you. But that's no reason to ignore what's going to happen to all your belongings when you die.
Most of us think estate planning is only for the wealthy. But nearly everyone leaves some kind of estate, which is nothing more than your property, possessions and capital. Deciding what should be done with it when you die is an essential part of your long-term financial plan.
"The bottom line is, if there are no relatives, the state -- after a period of time -- gets your estate," said Michael Weatherwax, a certified public accountant and owner of Michael Weatherwax & Associates in Boulder.
Estate planning is especially important in a world of multiple marriages and "spliced" families, he said. "Intestacy rules have a very precise pecking order about who gets what [if it hasn't been spelled out in a will or trust document]. And it may not be your blood heirs who inherit unless you specify it."
At the very least, you should draw up a will. You may also want to consider various kinds of trusts, which can help reduce estate taxes, provide professional management of assets after death, control income for children or parcel out contributions to your favorite charities.
A trust is simply a transfer of your property and financial assets into a fund you set up on behalf of beneficiaries. It is administered by a trustee, which can be yourself in a "living trust" or can be a bank or another third party. The trust holds title to the property and manages it on your behalf.
Federal law exempts the first $600,000 of an individual's estate (or $1.2 million for a couple) from taxes. What many people don't realize, however, is how easy it is to break that $600,000 barrier, says the Institute of Certified Financial Planners, a national organization based in Denver.
Your biggest asset -- your home -- probably has appreciated dramatically over the last 10 years. Your estate also would include the proceeds of life insurance policies, personal property such as cars and boats, investment assets and pension benefits.
And once your estate tops $600,000, the effective tax rate kicks in at 37 percent and rises to as much as 50 percent, Mr. Weatherwax said. That's where a trust can be a useful tool for reducing tax exposure.
For example, if a couple's net worth is $1 million and the husband dies first, he can will $500,000 tax-free to his wife and leave $500,000 in a trust to his children, with income from the trust reverting to his wife during her lifetime.
A trust also can help you avoid probate, which is the court process of validating your will and supervising estate administration.
There are two basic types of trusts: a living trust, which is created while you are living, and a testamentary trust, which is created by a will upon death.
A revocable living trust allows you to change the terms of the trust if you change your mind. Because a trust doesn't expire at your death, it is an alternative to passing property through your will.
A living trust also avoids probate, although a testamentary trust, by its very nature, does not.
Financial planners caution that living trusts aren't for everyone. If privacy is desired, or if your estate is likely to be contested, this it is probably the way to go. But it can be expensive. In states where probate is streamlined, or if the estate is modest, the expense of a trust may not be justifiable.
Also, although a trust is more difficult to contest than a will, it still can be challenged in court, the financial planners group says.
And, says Mr. Weatherwax, it is effective only if all of your assets have been transferred into the trust. Otherwise, probate will be necessary for those left out.
Trusts and wills are fairly complex matters and should be drawn up with the help of competent advice. A certified public accountant can help you set up a trust; you need a lawyer to write a will; and a certified financial planner can show you a range of other estate planning tools.
Before you make an appointment, you may want to review in depth some of the options. Here are several self-help guides:
"Plan Your Estate," Nolo Press, $17.95; "The Living Trust," Contemporary Books, $19.95; "The Simple Will Book," Nolo Press, $17.95; "The Essential Guide to Wills, Estates, Trusts, and Death Taxes," American Association of Retired Persons.