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Transferring assets tax-free: 2006 update
New tax law increases gift tax exclusion limitsThanks to changes in the 2006 tax law, you can give away more money as gifts without paying the federal gift tax. Gifts that meet the guidelines are also tax-free to the recipient.
Following are the new maximum limits for gift-giving.
Gifts to . . . Given by . . . Old New Maximum Gift Maximum Gift
Individual Individual $11,000 $12,000
Individual Married couple $22,000 $24,000
529 college savings Individual $55,000 $60,000*plan/prepaid tuitionplan
529 college savings Married couple $110,000 $120,000*plan/prepaid tuitionplan
Spouse who is not Spouse who is $110,000 $120,000a U.S. citizen a U.S. citizen
* For gift tax purposes, contributions larger than $12,000 (individual) and $24,000 (married couple) are prorated over five yearsand require the filing of gift tax returns.
See how gifts can fit into your estate planningGifts are not only a way to help relatives, friends, or worthy causes; they are aneffective estate-planning strategy because they can help reduce your estate andleave less of your assets vulnerable to the estate tax.
There are no restrictions on the number of gifts you can give tax-free—as longas each gift meets the annual exclusion.
© 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. PTGTX 102006
G E T A F I N A N C I A L S T A R T
Plan Your Estate
financial skills for life™plaintalk®
Clear, candid PlainTalk investment guides provide the practical tips and
tools you need to take charge of your financial future. And when you’re
ready for even more help, Vanguard can provide the expert consultation
and advice you need. For more information about our advice services,
visit www.vanguard.com/?plaintalk or call 1-800-962-5258.
You Need a Good Estate Plan 2
Step 1: Size Up Your Situation 5
Step 2: Minimize Your Taxes 10
Step 3: Get to Know the Basic Tools 13
Step 4: Pick an Estate PlanningProfessional 22
Get Started Now 23
C O N T E N T S
1P L A N Y O U R E S T A T E
Let’s face it. Your death will be a difficult time for your
family and friends. But if you leave behind a poor estate
plan—or no estate plan—it will be even worse. At best,
legal problems and delays will add to their grief; at worst,
state law will decide when and how your property is
distributed, no matter what you or your survivors might
have wanted.
With a good estate plan, you can ensure that your family’s
financial needs are met, your property is distributed in a
timely and proper manner to the people or organizations
you want to benefit, and the taxes, fees, and work involved
in settling your estate are minimized.
Estate planning is a complex process, one best tackled
with the help of capable, experienced professionals. This
PlainTalk guide is intended to help you understand the
basics of estate planning so you are prepared to meet with
a professional to create or update a plan that meets your
family’s needs.
Estate planning isn’t just for the very
rich or the very old—and it involves
more than just planning to reduce
taxes. Everyone needs an estate plan.
Without one, you could put your
family’s financial security in jeopardy.
If you don’t have an estate plan, you
need to create one now. In addition
to providing peace of mind, a flexible,
up-to-date estate plan can help:
• Provide support and financial
stability for your surviving spouse.
• Preserve assets for later generations.
This may be especially important
if your estate is large enough to be
subject to estate and inheritance
taxes or if you have children from
a previous marriage.
• Ensure that your wishes are carried
out when you die or can no longer
manage your affairs.
• Provide care and support for your
children or grandchildren, especially
minors or those who have special
needs, perhaps because of disabilities
or chronic illness.
• Support a favorite charity, college, or
cause with a gift of money, securities,
or other property.
• Ensure that your assets are distributed
in a timely fashion, with a minimum
of legal hassle.
• Minimize the taxes and expenses that
can be incurred as part of settling an
estate.
• Provide sufficient cash to meet
expenses and avoid the forced sale
of assets.
• Ensure that the beneficiaries named
on your life insurance and retirement
plans are still the people you want to
benefit and that those designations
are coordinated with your other
estate planning documents.
• Protect your family’s privacy. (A will
becomes a public record once your
estate is settled, so anyone who has
an interest in your finances can pry
into them. An estate plan can be
designed to prevent that.)
2
You Need a Good Estate Plan
T H E V A N G U A R D G R O U P
• Set and meet the expectations
of survivors to avert confusion,
resentment, and even lawsuits.
• Make certain that your family
business can survive and prosper
during the transition after
your death.
Traditional estate planning involves
preparing a will, creating trusts,
naming beneficiaries for insurance
policies and retirement accounts,
selecting guardians for minor
children, and many other tasks. In
addition, some families need to take
on estate tax planning. A failure to
plan for taxes could leave your family’s
property vulnerable to the federal
estate tax, which has a maximum rate
of almost 50%. And most states also
impose some form of death tax.
Don’t think you have enough assets
to worry about the estate tax? Just
about everything you own or have
the right to control is subject to the
estate tax: homes, investments,
insurance proceeds, retirement plans,
jewelry, collectibles—everything.
When you add it all up, you may be
surprised at the size of your estate.
The 2001 federal tax law unleashes
important changes every year through
2011. If your estate plan was created
before this law was enacted, you
almost certainly need to revise your
plan because of the many changes in
the law.
3P L A N Y O U R E S T A T E
Because of those continual changes,
estate planning documents should be
written in very flexible terms. And you
need to explain your intentions clearly
to those who will serve as executor of
your will or as trustees so they can
ensure that your estate planning goals
are achieved. In some situations, it may
be beneficial to give your executor and
trustees some additional powers to
ensure your wishes are fulfilled.
Obviously, a good estate plan is
essential to your family’s financial well-
being. What follows are four simple
steps that will help you and your estate
planning advisors create that plan.
Many people use a team of experts to
help develop an estate plan: a financial
planner or investment manager, a trust
officer, an accountant, and an insurance
agent. An estate planning attorney can
help develop strategies, but he or she
must be the one to actually draft the
estate plan’s documents.
4 T H E V A N G U A R D G R O U P
Help your family’s next generation
plan their financial futures with
assistance from our PlainTalk guides.
Click on Get a Financial Start at
www.vanguard.com/?plaintalk.
"web link
5P L A N Y O U R E S T A T E
Two key elements provide the basis
of your estate planning: the nature
of the assets in your estate and the
characteristics of your intended
beneficiaries.
Some assets—such as a family
business—require a major commitment
from the recipient, while other assets—
such as a portfolio of mutual funds—do
not. Some assets can be left by will or
personal trust, while others—such as
retirement accounts and insurance
proceeds—are usually left to the
beneficiaries designated on the accounts
or policies. (Making sure the right
beneficiaries are named is an essential
part of estate planning.)
It’s also important to think about
your beneficiaries. Are they people
or organizations? Are they minors or
adults? Do you have children from a
previous marriage? Are your intended
beneficiaries good at managing money,
or will they need help? A number of
factors will contribute to your decisions
about who will receive what assets and
how they will receive the assets. A
charity might prefer to receive your
money, while your affluent son might
prefer to get the family beach house.
Step 1: Size Up Your Situation
plan
6 T H E V A N G U A R D G R O U P
Let’s say you want to name your
daughters as two of your beneficiaries.
One is a thrifty and successful investor,
but the other has no interest in
investing and tends to overspend. You
might leave the first daughter money
free and clear. But to protect the
second daughter, you might leave the
money to a trust that would provide
professional financial management and
control how the money can be spent.
If you are married, your spouse
needs to be involved in your estate
planning from the start. Some
important strategies you’ll want to
consider require coordination between
both spouses’ plans. You should also
discuss your estate planning with other
family members if possible. Hard
feelings can arise when items that have
sentimental value for one relative are
unknowingly left to another.
Start your estate planning on page 7 by
drawing up an inventory of all your
property, along with a realistic estimate
of each asset’s value. Give careful
consideration to each of your potential
beneficiaries, and make note of any
characteristics that might affect how
you would want them to benefit from
some property or assets in your estate.
Once you have completed your
inventory, take time to become
familiar with the basics of estate
planning. That will help you work
most effectively with your estate
planning professional.
The many changes to the tax law
between now and 2011 could affect
how much each of your beneficiaries
will receive—unless you have a
flexible, up-to-date estate plan.
quick t ip•
Your Personal Inventory
worksheet
Name Characteristics
Your Assets
Forms of Assets Ownership*
Primary residence $
Mutual funds, stocks, bonds, and other investments
Cash, CDs, and bank accounts
Retirement accounts
Personal property (cars, jewelry, artwork)
Life insurance benefits
Vacation home and other real estate
Private business interests
Other assets
Total Assets $
Your Debts
Mortgage loans $
Personal debt (credit cards, car loans)
Other obligations
Total Debts $
Your Estate’s Value (Total Assets minus Total Debts) $
*Is the property held in your name, your spouse’s, jointly, or some other way?
Potential Beneficiaries
7P L A N Y O U R E S T A T E
9P L A N Y O U R E S T A T E8 T H E V A N G U A R D G R O U P
The federal government taxes gifts of
property between people whether the
giver is alive (the gift tax) or deceased
(the estate tax). The tax rates are
progressive, based on the value of the
property being transferred. Many states
impose similar taxes.
Another federal tax that can be levied
on your estate is the generation-
skipping transfer tax (the GST tax).
Wealthy families were once able to
escape paying the estate tax twice on
the same assets by skipping their
children’s generation and leaving
property directly to their grandchildren.
To discourage that, the federal
government created the GST tax, which
is automatically imposed at the highest
federal estate tax rate in addition to any
estate or gift tax owed on assets left or
Tax Basics
given to the second generation. The
amount that is exempt from the GST
tax changes repeatedly in the coming
years. How you use that exemption
can be an important planning issue.
These are all taxes you may be able
to avoid or minimize with proper
planning.
The table below shows many of the
changes to the estate, gift, and GST
taxes that will result from the 2001
tax law. For 2010 only, the law will
change how you determine the cost
basis of an inherited asset. Note
that the estate tax is scheduled to
be repealed in 2010, only to return
in 2011. Of course, the federal
government could—and probably
will—change the law before then.
$2 million
$3.5 million
$1 million$1 million
Unlimited
$1.12 million$2 million
$3.5 million Unlimited
$1.38 million*
$1 million
49% 48% 47% 46% 45% 35% (gifts only)
55%
$1.5 million
$1.5 million
Estate and GSTtaxes eliminated.
Modified cost-basis in effect.
Estate and GSTtaxes
reinstated.
Deduction forfamily-owned
business isrepealed.
*This amount is an estimate; the actual exemption will depend on a cost-of-living adjustment. This estimate assumes a 3% cost-of-living adjustment.
2011 and2003 2004 2005 2006 2007 2008 2009 2010 Beyond
Federal estate-tax exemption
GST-tax exemption
Gift-tax exemption
Maximum rate for estate, GST, and gift taxes combined
Worth noting
Because the federal estate, gift, and
generation-skipping transfer taxes
have maximum rates of almost 50%,
you’ll want to do an appropriate
amount of planning based on the
size of your estate.
Most families don’t have enough
assets to make the estate tax a concern.
If your estate (including your spouse’s
property) will be under $1 million, you
probably don’t need to worry about
estate tax planning—at least not yet.
If you have more than $1 million,
you need to consider estate tax
planning. The more assets you have,
the more aggressive and complex
your plan may become.
Many strategies for reducing estate
taxes are complicated and involve
giving up control of some assets
during your lifetime or require
the filing of additional income tax
returns each year. And some risks
can be involved—a novel estate tax
planning strategy could be challenged
in court.
As you think about your estate plan
and as you work with an estate
planning attorney, always keep these
factors in mind:
• How important is it for me to control
all of my assets during my lifetime?
• How much complexity can I deal with,
and how much work am I willing to do
to save on taxes?
• How much legal risk am I willing to
take by using aggressive strategies
in my estate plan?
You and your advisor or attorney
might very reasonably decide that
your answers to those questions will
rule out certain estate tax planning
strategies. For some people, the
amount of discomfort and hassle
caused by these strategies simply may
not be worth the amount of tax they
would save.
10
Step 2: Minimize Your Taxes
T H E V A N G U A R D G R O U P
Three Tiers of Estate Tax Planning
Although there are many exceptions,
families having estates worth more than
$1 million can generally be divided into
three tiers to determine which estate
tax planning strategies they should
consider, as shown in Figure 1. Your
estate planning advisor or attorney
can explain more about some of the
strategies listed and others and help
you determine whether they’re right
for you.
Families in the first tier should use
a basic strategy, making sure that
they take advantage of what the law
provides, such as tax credits. A family
in the second tier should be more
aggressive, trying to freeze their
estate at its current level and shifting
appreciation to the next generation.
A family in the third tier might be
more aggressive still and actively try to
reduce the value of the family’s estate.
11P L A N Y O U R E S T A T E
Figure 1. Tax Planning Tiers
Size of Estate Sample Techniques*
Tier 1: $1 million to $2 million • Credit shelter or bypass trusts.Basic • Life insurance trusts.
• Modest tax-free gift giving.• Marital trusts.
Tier 2: $2 million to $5 million The above, plus:Freeze Estate • Maximize tax-free gift giving.
• Conservative estate-freezing strategies, suchas grantor retained annuity trusts and intrafamilysales and loans.
• Charitable lead trusts.
Tier 3: More than $5 million The above, plus:Reduce Estate • Generation skipping transfer tax trusts.
• Private annuities.• Aggressive estate-reduction strategies, such
as family limited partnerships and restrictedmanagement accounts.
• Taxable gifts.
*Ask your estate planning advisors what techniques might be best for you. This is only a small sample of the tools used in estate taxplanning; there are many varieties and alternatives.
Transferring Assets Tax-Free
One of the most basic tools for estate
tax planning is giving money away so
that it’s no longer in your estate and
vulnerable to the federal estate tax or
to state death taxes. Here are some
ways to transfer assets to relatives,
friends, or worthy causes without
incurring taxes:
• Give any number of people up to
$11,000 each in one year (the limit
in 2003; that amount will be adjusted
periodically for inflation). Married
couples can give a person $22,000
in one year. Gifts to minors must
usually be made through a Uniform
Gifts to Minors Act (UGMA)
account, a Uniform Transfers to
Minors Act (UTMA) account,
or a special trust.
• Give an unlimited amount to a
favorite charity.
• Make gifts or bequests up to the
amount exempted under the estate
and gift tax credits.
• Contribute up to $55,000 ($110,000
for married couples) in one year to
a Section 529 college savings plan
or prepaid tuition plan on behalf of
another person. For gift tax purposes,
contributions larger than $11,000
are prorated over five years and
require the filing of gift tax returns.
• Pay any amount toward another
person’s tuition or medical bills
directly to the school or medical
provider.
• Give any amount to your spouse
if he or she is a U.S. citizen; up to
$110,000 a year to a spouse who
isn’t a U.S. citizen.
Strategies such as these are important
because they can help shrink your
estate, leaving less property vulnerable
to the estate tax. Giving money during
your lifetime also enables you to see
how you’re helping a child or
grandchild—perhaps with a down
payment on a first home or with
education expenses. Of course, while
helping others is obviously very nice,
you want to make sure you keep
enough to have a secure and
comfortable standard of living.
12 T H E V A N G U A R D G R O U P
The estate and gift taxes aren’t
the only taxes you should try to
minimize. Learn how to cut current
income tax on your investments
by taking advantage of our
Be a Tax-Savvy Investor guide at
www.vanguard.com/?plaintalk.
"web link
At its most basic level, estate planning
starts with the ownership of your
property and how it will pass to your
beneficiaries when you die. Some
of your property may be held in a
personal trust, some may be owned
by you, some by your spouse, and
some by both.
Many people rely on a last will
and testament (a set of written
instructions) to dictate how their
property is to be distributed upon
death. Despite its name, a “last” will
isn’t always the last word on how your
property will be distributed.
Property held in a trust would be
distributed according to the terms
of the trust—no matter what the
will says. Similarly, the naming of
beneficiaries on retirement accounts
or insurance contracts can override
the terms of a will. (Beneficiaries are
commonly named on IRAs, retirement
plans, insurance and annuity contracts,
and directed beneficiary accounts,
which are also known as “transfer on
death” accounts.)
In addition, property can also be
distributed according to the terms of a
partnership or shareholders’ agreement.
And state law may dictate how some
property is distributed to ensure that a
spouse and minor children receive a
minimum percentage of the estate.
13
Step 3: Get to Know the Basic Tools
P L A N Y O U R E S T A T E
Personal Trusts
A personal trust is a legal arrangement
through which property is held by a
trustee on behalf of a beneficiary. The
person who creates the trust is known
as the grantor (or sometimes as the
creator, donor, settlor, or trustor), and
the person or company holding the
property is known as the trustee.
The two main categories of trusts are
those created when the grantor is alive
(a living or inter vivos trust) and those
created upon the death of the grantor.
• Revocable trusts are among the trusts
that you could create while you are
alive. They can be changed or
revoked at any time during your
lifetime, so you always have control.
When you die, the trust becomes
irrevocable (unchangeable).
• Irrevocable trusts can be created
either while you are alive or through
the terms of a will or other personal
trust after you die. Once they are
created, they cannot be changed or
revoked. Some irrevocable trusts
provide tax benefits that aren’t
available through any type of
revocable trust.
14 T H E V A N G U A R D G R O U P
Are you concerned that your estate
may be subject to taxes? Our Personal
Financial Planning Service can help
with an estate planning analysis. Call
1-800-962-5258, or go to our website
at www.vanguard.com/?pfp.
quick t ip•
Trusts are often used as part of a
plan to minimize or eliminate estate
taxes, but there are also good reasons
unrelated to taxes for using a personal
trust. Here are some situations in
which you might choose to set up a
trust while you are alive:
• You or a family member will need
professional asset management in
the event of incapacity or for some
other reason.
• You don’t have the time or inclination
to manage your financial affairs.
• You want a professional trustee to
run your estate after you die, and you
want to “test-drive” the trustee.
• You own property in more than one
state, or you move often from state
to state.
• Your probate estate (the property
passed by a will) could be subject to
creditors.
• Probate costs and hassles are so bad
in your state that they should be
avoided.
• Your will is likely to be challenged in
court or receive publicity.
But there are also reasons why you
might choose to have a trust created
upon your death:
• You have a child or children from a
previous marriage.
• You have minor children or a child
with special needs.
• You doubt your beneficiary can
manage the assets.
• You want to provide incentives for
your beneficiary to get an education
or achieve other goals.
• You want to control how your
beneficiary uses the money.
• You want the trust assets to
eventually go to a charity or someone
other than the initial beneficiary.
• You want to use a single fund
to benefit different people at
different times.
15P L A N Y O U R E S T A T E
16 T H E V A N G U A R D G R O U P
The person or company you name
as your trustee will manage the
trust’s assets and distribute income
and property under the terms of the
trust document. In some cases, you
would be the trustee—so you would
retain full control of the assets during
your lifetime. In other cases, a person
or corporate trustee (usually a trust
company or a bank) would be the
trustee. In order to achieve tax
benefits from some types of trusts,
it is sometimes necessary to name a
person other than yourself or a relative
as trustee.
While you may be thinking about
naming as trustee a friend or relative
who is familiar with the beneficiaries,
that person may not have the time or
expertise required to manage the assets
and handle the administrative chores.
A corporate trustee could handle the
asset management and administration
of the trust, but it might lack the
personal understanding of your
beneficiaries’ needs.
One solution to those issues is to
name co-trustees—a corporate
trustee to run the trust, and a friend
or relative to provide guidance about
the beneficiaries’ needs. You should
name a successor trustee for any
individual you name as trustee in case
he or she dies, becomes incapacitated,
or simply no longer wants to serve
as trustee.
Looking for a company you can trust
to serve as a trustee? Call Vanguard®
Asset Management Services at
1-800-962- 5258, or visit our website
at www.vanguard.com/visit/ams
for more information about our
services and the Vanguard National
Trust Company.
quick t ip•
17P L A N Y O U R E S T A T E
How Personal Trusts Can Reduce Estate Taxes
Some of the most common types of
personal trusts are those used to help
married couples reduce or eliminate
estate tax. The most important of
these is the credit shelter or bypass
trust that is created when the first
spouse dies.
Consider a couple, Dawn and
Dave, who have a combined
estate of $3 million. They meet
with their estate planning advisor,
who recommends that a credit
shelter trust be established upon
the death of the first spouse. To
explain why, the advisor diagrams
what could happen with and
without one in Figure 2.
Figure 2. What a Difference a Trust Makes
With a Credit Shelter Trust Without a Credit Shelter Trust
Combined $3 million. $3 million.estate
Dave dies • $1.5 million to credit shelter trust. $3 million to Dawn.in 2004 • $1.5 million to marital trust
controlled by Dawn.
Dawn dies No estate tax due. Estate tax of $460,000 in 2006 due on $1 million.
By leaving $1.5 million to a credit shelter trust, the couple is able to use Dave’s estate tax credit to shieldthat money from the estate tax. The assets in that trust are available to Dawn as needed. The remaining$1.5 million is controlled by Dawn through a marital trust.
When Dawn dies in 2006, the assets remaining in the credit shelter trust can go to the couple’s childrenand other beneficiaries free of estate tax. (This is true even if the assets in the credit shelter trust havegrown to more than $2 million—the amount to be shielded by the estate tax credit in 2006.) In addition,Dawn’s estate is able to take advantage of her estate tax credit in transferring the assets remaining inthe marital trust to the couple’s children and other beneficiaries.
Without personal trusts, it’s likely that only one spouse’s estate tax credit can be used. Dave can leavethe entire $3 million to Dawn free of estate tax because of the unlimited marital deduction. But whenDawn dies in 2006, only her estate tax credit will be available to the estate. This means only $2 millionwill be shielded from estate tax, leaving $1 million subject to taxation.
To fully fund a credit shelter trust, a couple must arrange their assets in a certain way. If property is held jointly, it may not be available to fund the trust; each spouse must have enough assets in his or her name to take full advantage of the trust. And if a beneficiary other than the credit shelter trust isnamed on an account, the assets in that account can’t be used for the trust.
(law protects upto $1.5 millionfrom estate tax)
(law protects upto $2 millionfrom estate tax)
18 T H E V A N G U A R D G R O U P
Last Will and Testament
A last will and testament (or, more
simply, a will) is a set of written
instructions explaining when and how
probate property is to be distributed
after the owner’s death. (Probate
property is everything you own that
isn’t distributed through a trust or by
the naming of an account beneficiary.)
A will is also used to create personal
trusts. Probably the most important
nonfinancial reason for creating a will
is to name a guardian for any minor
children. If you don’t have a will, a
state court will dictate who will
become guardian of your children.
Before naming a guardian, make sure
he or she is willing to take on the job
and has ideas on child-rearing that are
compatible with yours.
Even if you plan to distribute all your
property through trusts or beneficiary
designations, that doesn’t mean you
can neglect your will. Let’s say you
receive some property outside of
your trusts that can’t be passed by a
beneficiary designation. You need a
will to direct how those assets are to
be distributed.
When a person dies, a state court
reviews his or her will to determine
whether it’s valid and then oversees
the distribution of property in a
process called probate. In some states,
probate can be time-consuming and
expensive, so many people choose to
distribute at least some assets through
estate planning tools (such as trusts)
other than a will. Another reason
that people use trusts or other tools
to transfer property is that a will
becomes a public document once an
estate is settled, so anyone can find out
about the family’s finances. Transfers
remain private if they are done through
a personal trust or by naming a
beneficiary directly on an account.
19P L A N Y O U R E S T A T E
In your will, you’ll name an executor,
who is the person or company in charge
of administering and distributing your
estate. (The executor is sometimes
referred to as the administrator or the
personal representative.) This person is
responsible for managing the assets in
the estate until they’re distributed and
for preparing the tax returns for estate
and inheritance taxes and income tax
on any earnings received by the estate
before assets are distributed.
If you name a person as executor, make
sure he or she is willing and able to
take on the work and is familiar with
your wishes. Although you may want
to name a friend or relative as executor,
carefully consider whether that person
has the financial and legal savvy to
handle the job. You’ll probably want to
name some alternate executors in case
your first choice dies, can no longer
handle the job, or simply doesn’t want
to serve as executor.
Some people name a bank or trust
company as executor. These companies
can be expensive, but they have staffs
of professionals who are experienced
at handling estates and preparing the
necessary tax returns, so they may be
able to settle your estate more quickly
than a friend or relative could.
protect
20 T H E V A N G U A R D G R O U P
Substitutes for Wills
Property isn’t passed on only through personal trusts and a last will and testament.
You can also leave property through beneficiary designations, business contracts,
and certain forms of ownership—all of which can be thought of as substitutes
for wills.
Consider the case of Phil, who’s a partner in a small business with his brother,
Jack. Their business agreement spells out that a surviving partner has the right to
buy out the other’s shares if one dies. The business provided life insurance as a
benefit, and Phil named his brother as the beneficiary. Phil named his cousin,
Jennifer, as beneficiary of his retirement accounts, and he had some investment
and bank accounts with no beneficiary named.
Phil recently married Susan, and they bought a house as joint owners with right of
survivorship. He and Susan drew up wills, naming each other as the sole inheritor
of all their property, including Phil’s share of the business. Phil assumed that the
will would take care of everything—but he was wrong.
Because he didn’t update his beneficiary designations, here’s what would happen if
Phil died.
The will would have been overridden by some of the will substitutes—the
business agreement and the designations of beneficiaries on the insurance policies
and retirement plans. Susan might have some recourse if her state law dictated
(as many do) that a surviving spouse must inherit a certain percentage of a
spouse’s assets. But she might not have been able to get back a significant part of
Phil’s estate.
The point of this example is that a will is only a part of an estate plan. People
also need to consider beneficiary designations (their “retirement plan wills” and
“insurance wills”), business agreements, and other substitute wills that can pass
property on. And they must keep those substitute wills up to date, or their
property may not go to their intended beneficiaries.
Property: Business House Insurance Retirement InvestmentProceeds Plans Accounts
Recipient: Jack Susan Jack Jennifer Susan(brother) (wife) (brother) (cousin) (wife)
Other Estate Planning Tools
Your estate plan isn’t complete even if
you have some personal trusts and a
will. A number of other tools can help
protect you and your family in a variety
of ways. Some of the more common
tools are listed below.
• Advanced directive for health care
(often called a living will) to provide
instructions to your physician on the
types of life-sustaining treatment
you do and do not want if you are
unable to make your wishes known.
• Health care power of attorney to
enable a trusted relative or friend to
make decisions about your medical
care if you are unable to do so.
• Financial power of attorney to arrange
for the handling of your affairs and
the management of your assets if
you are no longer willing or able
to do so.
• Letter of instruction to tell your
family your wishes in such matters
as funeral plans and obituary
information that aren’t covered by
other documents.
• List of emergency information to help
your family locate your assets and
to provide the names and phone
numbers of key contacts such as
lawyers, accountants, and others
who may be needed.
An estate planning professional can
help you create a plan that’s right for
your unique circumstances and the
laws of the state or states where you
live or own property. That plan may
well include some elements not
discussed here.
21P L A N Y O U R E S T A T E
The federal laws affecting estates
changed a lot in 2001 and will continue
to change each year through 2011. So
an estate plan you created under the old
laws could very well fail to accomplish
your goals. You and your family need an
expertly designed plan that’s flexible
enough to fulfill your wishes both now
and as the rules change.
Because of changes in the federal laws,
many states are also changing their
laws, especially those involving estate
and inheritance taxes. And state laws
vary greatly. What may work in your
state of residence may not work in
another state where you own property.
Worse, seemingly small errors in an
estate planning document can make it
invalid—possibly shortchanging your
beneficiaries. For these reasons, families
often use a team of experts to develop
an estate plan, perhaps including a
financial planner or investment
manager, a trust officer, an insurance
agent, and an accountant. Many
professionals can help in designing
an estate plan, but eventually you’ll
need a lawyer who practices estate
law to draft the documents.
How can you find qualified estate
planning professionals? Start by asking
trusted friends, financial and legal
advisors, and colleagues to recommend
people. Then check their credentials:
This is a specialized area, and you
want a bona fide specialist.
Interview candidates before hiring
anyone, getting a detailed explanation
of what they can and cannot do. They
should be able to provide you with a
reliable estimate of the cost based on
your family’s situation and the size and
complexity of your estate. Importantly,
make sure you and your family are
comfortable with the person you hire;
estate planning can involve some very
private and personal issues.
22
Step 4: Pick an Estate Planning Professional
T H E V A N G U A R D G R O U P
Now that you know how important
estate planning is, it’s time to get
started. If you die or become
incapacitated without an estate
plan in place, the consequences for
your family can be devastating.
Think about the two key elements
of estate planning: the nature of
your assets and the characteristics of
your intended beneficiaries. Which
of our beneficiaries can handle wealth?
Which could not? Do any have special
needs? Which of your assets should go
to which beneficiaries? Don’t forget
to include favorite charities and other
causes if you’re so inclined.
Now get started by writing down a
list of your assets, your estimate of
what they’re worth, and where they’re
located (start with the worksheet on
page 7). If you know to whom you’d
like to leave specific pieces of property
such as cars, furniture, jewelry,
collectibles, or artwork, note that
on your list. This inventory will be
extremely helpful when you actually
begin working with an estate planning
professional.
Next, compile a list (including
addresses and phone numbers) of
people who might have some role in
your estate plan—potential trustees
and executors.
You can draft your list of emergency
information and letter of instruction
yourself. But the other documents in
your estate plan need to be drafted by
a professional. Now you can start
calling around to find and hire that
professional.
23
Get Started Now
P L A N Y O U R E S T A T E
How Vanguard Can Help
You might want to begin with
Vanguard® Personal Financial
Planning Service, which offers an
estate planning analysis for a one-time
fee of $500. (Discounts are available
to Flagship™ and Voyager™ clients.)
Our knowledgeable estate planners
can assist you in assessing your estate’s
current value and structure, helping
you to minimize the tax burden on
your estate and your survivors, and
showing you how to preserve assets for
future generations. Learn more about
our planning service by visiting our
website at www.vanguard.com/?pfp
or calling 1- 800-962- 5258.
If you have personal trusts that you’d
like to move to Vanguard or if you
are considering creating one with
us, call Vanguard Asset Management
Services at 1-800-962-5258. As a
client, you can consult with our estate
planning attorneys and trust officers
at no additional cost. You can learn
more about our trust services at
www.vanguard.com/visit/ams.
24 T H E V A N G U A R D G R O U P
Whatever your financial goals, PlainTalk investment guides can help you
achieve them. If you enjoy the convenience and interactivity of online
planning, visit PlainTalk on the Web at www.vanguard.com/?plaintalk.
It’s packed with useful investment information and planning tools. PlainTalk
programs are also available by mail. Order online, or call 1-800-962-5258
business days from 8 a.m. to 10 p.m. or Saturdays from 9 a.m. to 4 p.m.,
Eastern time.
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