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Business Matters Tips for retirement planning

February 16, 2011

By Staff Reporter

By Kevin FitzGerald

My husband and I recently completed a review of our retirement plans since we plan on retiring within the next five years. We’re not multi-millionaires, so I’d like your opinion on what our estate plans should be.

— R.M., Tarrytown

Many investors go to great lengths to take care of their financial responsibilities. They prepare for their children’s college education costs and their own retirement, and perhaps have reduced income taxes where possible by investing in tax-free and tax-deferred vehicles. Hopefully, when these goals are reached, the responsible investor will have accumulated enough wealth to pass along to heirs or to a favorite charity.

However, many investors leave out one important element in their financial plan — estate planning. It may be surprising to learn that much of your wealth may not reach those whom you intend. That’s because without proper planning, estate taxes could take as much as 55 percent, from your estate.

Estate planning was once considered necessary only for wealthy individuals, but today many people can benefit from an estate plan. A simple will and a life insurance policy may not be enough. While a simple will outlines your wishes, it does little to protect your assets from estate taxes.

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Married individuals can use the Unlimited Marital Deduction to postpone payment of estate taxes until the death of the second spouse. The Federal Unified Estate and Gift Tax law gives each person a tax credit — the Unified Credit — which protects estates worth $625,000 or less from estate tax in 1998. This amount increases to $650,000 in 1999 and gradually to $1 million by 2006. In order to take full advantage of the Unified Credit, wills of married couples should utilize the credit shelter trust, often called a bypass or A/B trust, and the trust should be funded with assets that are individually owned. But for many married couples, up to half of the Unified Credit can easily be forfeited if asset ownership and wills are not properly structured.

Individuals and married couples with a gross estate over the amount of the Unified Credit need to establish a comprehensive estate plan. Although many people underestimate the value of their estates, all assets that an individual owns at the time of death are included: life insurance proceeds, brokerage accounts, real estate (including your primary residence), cars and home furnishings such as furniture, art, collectibles and appliances, to name a few.

Formulating an estate plan

1. Consult with an estate-planning attorney about obtaining a current, signed will. (Some full-service investment firms can help through their own national networks of independent attorneys who are knowledgeable in estate planning issues). Utilize the credit shelter trust, if appropriate.

2. Appoint an executor and co-executor to manage your estate; otherwise the court may appoint one.

3. Transfer assets while you are alive. This may lower your taxable estate. The annual Gift Tax Exclusion allows an individual to gift up to $10,000 a year to an unlimited number of individuals without incurring federal gift taxes. (Married couples can gift up to $20,000 a year to each donee).

4. Establish a trust, which is a legal arrangement that transfers ownership of assets to a trustee who manages them for your beneficiaries. There are many different kinds of trusts, each designed to reduce income and estate taxes and meet specific estate planning needs.

5. Purchase life insurance. Life insurance proceeds can provide for your heirs and can also be used to pay estate taxes.

6. Review asset ownership to maximize the Unified Credit.

7. Arrange for the long-term health care needs of you, your spouse and parents. One option is to purchase long-term care insurance.

8. Provide someone you trust with Power of Attorney. This person would manage your financial affairs in the event you become disabled.

9. Consider applicable state inheritance taxes.

Some need to plan more

While everyone benefits from estate planning, it is especially crucial for some to properly plan their estates or those of their spouse or business partner:

€ Business Owners: If you own a business, plan for a successor. Estate taxes paid by a business after the death of the owner often cause the business, even a thriving one, to fail. Have a professional determine the current value of your business. Prepare a buy/sell agreement, if appropriate.

€ Women: Generally, women live longer and, according to the Bureau of Labor Statistics, earn less than men. Lower pay and time away from the workforce to care for children result in reduced Social Security and pension benefits. Women are more likely than men to depend on what their spouse leaves behind, so they are subject to more risk if a proper estate plan is not in place.

Plan for tomorrow

Many people put off planning their estate because it confronts their mortality. It also raises sensitive issues about the equitable distribution of an estate. While many people think about the subject, it’s important to discuss it and take action with family members and professional advisors. With the wide array of planning techniques available today, it’s important to seek the advice of estate planning attorneys, professional trust consultants and investment professionals who can help you customize an estate plan to your specific needs.

PaineWebber does not provide tax or legal advice. The strategies discussed above should be reviewed with your attorney and/or other tax professionals to determine if they are appropriate for you.

This information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitute a solicitation for the purchase or sale of any security.

Kevin FitzGerald is first vice president-Investments at Paine Webber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 654-6162, ext. 448.

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