V a n g u a r d F i n a n c i a l E d u c a t i o n S e r i es ®
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ES Tat e p l a n n i ng
How to create an
estate plan that will
help your family
People don’t like to
think about their own
demise. Perhaps that’s
why most Americans
lack a will.
Yet the absence of clear direction about who should
inherit your money and possessions—or even who
should raise your children—could cause no end of
heartache for your family.
A well-made estate plan would be a wonderful gift
to the people who love and depend on you.
Identify your goals
A well-made estate plan addresses both personal and financial
issues for your family.
Personal
Financial
Make your health-care preferences clear
should you be unable to communicate.
Provide for the support of a surviving
spouse, children, or partner.
Organize your affairs to make the transition
easier on your survivors.
Distribute family heirlooms and valuable
assets according to your wishes.
Name the guardian whom you wish to raise
your minor children.
Minimize the taxes and expenses associated
with the distribution of your assets.
Maintain your privacy by avoiding probate,
the court‑supervised distribution of an estate.
Provide for the orderly transition of a
business, such as a family farm.
Estate Planning > 3
To begin, identify what you hope to achieve. These objectives will help
steer the estate-planning process.
Do you want to make sure your spouse and children can maintain
their current standard of living? Often that means analyzing your life
insurance coverage.
Do you want to leave an inheritance to your children from a previous
marriage while also supporting your current spouse? In that case, you
may need a trust to balance everyone’s interests.
Do you want to avoid estate taxes? Then you may need a gifting strategy to
reduce the value of your estate.
Common goals of estate planning
What are your goals?
Provide for a spouse.
1.
Support minor children.
2.
Provide for a special-needs family member.
3.
Avoid probate.
4.
Pass on a family business.
5.
Help with grandchildren’s education.
6.
Pass on a vacation home.
7.
Make a charitable bequest.
8.
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Have your will made
A will is a legally enforceable
document that expresses your
wishes for the distribution of your
assets. Requirements vary by state,
but in general a will must be:
• In
writing (handwritten or
typed), except under exceptional
circumstances.
• Signed
by the person whose
will it is.
• Witnessed
by two (or, in some
states, three) people who saw
the will signed.
To be sure that your estate plan
meets the needs of your family
and will be legally enforceable,
you should seek legal advice.
Consulting an estate attorney is
especially important if you or your
family has a large estate or owns a
small business, has a special-needs
child, or has children from a prior
marriage. If you already have a will,
review it to make sure it is current.
Important life events, such as a
birth, marriage, adoption, or divorce
may mean your will needs revision.
If you don’t have a lawyer, ask
friends to recommend one or
get a referral from your local
bar association.
If you die without a will, legally
assets would be divided according
to the formula established by the
laws of your state.
Your state may require that your
property be divided among your
spouse, parents, and children.
If your children are minors, their
share might have to be supervised
by a court-appointed guardian until
they reach adulthood.
It’s far better that you control the
disposition of your assets. If you do
not have a will, don’t put off creating
one. Put it on your must-do list.
Estate Planning > 5
Name an executor, guardian, and trustee
Identify the people who will
have important responsibilities
under your will. Typically these
will include:
executor. This person will
handle the settling of your estate,
from cataloging your assets,
paying your final bills, filing an
estate-tax return, to distributing
your property as you instructed.
• An
guardian. If you have minor
children or adult family members
who require supervision, you’ll
name this person to raise them
or take care of their affairs.
• A
trustee. If, under your will,
you create a trust for tax planning
purposes, or because a beneficiary needs professional money
management, or for any other
reason, this person or institution
would manage and distribute the
assets of the trust according to
the terms of the trust.
• A
Look for people whose
competence and integrity you
can rely on. An executor can be a
longtime trusted friend, a grown
child, or a financial institution that
has an estate or trust department.
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Because an executor has many
details to attend to, it would be
easier if you chose someone who
lives nearby rather than someone
who would have to travel a long
distance to get the work done.
If you name a guardian for your
minor children, make sure you’re
comfortable with his or her
parenting style.
Your trustee should be someone
who has the skill to manage assets
and also be sensitive to the needs
of the trust beneficiary. A trust
may have a long life, so the trustee
should be available to serve in this
capacity potentially for many years.
Make sure the people you choose
are willing to serve in the capacity
you’ve identified. These roles can
entail a good deal of time and effort
for which they may not be paid.
Finally, consider naming successors
to each of the persons you choose,
just in case any of your first choices
cannot carry out the duties of
executor, guardian, or trustee.
Review your beneficiaries
The money in your employer-sponsored retirement plan will go to
whomever you named as you beneficiary. You may have made your
beneficiary designation during your first week at work. It’s important
to check your selections again when you draw up your estate plan to
make sure the beneficiaries you named are still appropriate.
You should be able to check whom you’ve named by logging on to
your account at vanguard.com, calling Vanguard at 800‑523‑1188, or
contacting your benefits office.
Having the wrong beneficiary named can be a costly mistake, as this
hypothetical example shows: Beverly divorced John in 1997. John never
remarried and willed his entire estate to his brother Fred. But John
never removed Beverly as the beneficiary of his 401(k) account. When
John died, Beverly inherited John’s retirement account. The beneficiary
form, not his will, determined who received his 401(k) account.
Other assets that pass by contract to whomever you’ve named as your
beneficiary include IRAs, life insurance contracts, and annuities. It’s a
good practice to review these accounts periodically to make sure you
still have the right beneficiaries named.
See how your property is titled
Example: In his will, Joe left his
share of a family vacation cabin
to his son Jared. But he failed
to examine how the cabin was
titled. Joe owned the cabin in
joint tenancy with his brother Bill.
Under joint tenancy rules, Joe’s
ownership passed automatically
to Bill. The title superseded Joe’s
will. Jared will not inherit a share
in the cabin from his father.
When you’re planning your estate,
it’s important to understand how
you own each asset today. That’s
because the way your assets pass
can depend on several factors,
including the type of asset, how
the asset is titled, and federal
and state law.
Examine the deed to your home.
If you own it alone, it would pass
by the terms of your will. But if
you own it jointly, it might pass
automatically by title to your
co-owner (in the case of joint
tenants with rights of survivorship)
or to the person you name in
your will (in the case of tenants
in common).
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In addition to your house deed,
examine how your car and
checking, savings, and investment
accounts are titled. Be prepared
to discuss all this with your
attorney as part of the estate
planning process.
Finally, if you keep vital papers in
a safe deposit box, see who can
access it in your absence. You
may want your spouse or executor
to be able to open it without a
court order.
Will your estate be taxed?
Your executor will have to value
your estate and file a tax return.
Everything you own will be
counted in the value of your
estate, including life insurance
payouts, your home, retirement
plan accounts, automobiles,
IRAs, and personal possessions.
Under federal estate-tax law, in
2013 you can pass $5.25 million
tax-free to your heirs. Married
couples can pass on as much
as $10.5 million if both use their
federal estate tax exemptions.
These exemption amounts will
automatically increase annually by
the rate of inflation.
Furthermore, your estate won’t
be taxed on assets that pass to
your spouse, regardless of value,
if your spouse is a U.S. citizen.
The amount you can pass estate
tax-free to a spouse who is not a
U.S. citizen is limited.
Federal estate, gift, and generation-skipping tax exemptions for 2013
Federal estate-tax exemption
$5.25 million
Generation-skipping tax exemption*
$5.25 million
Gift-tax exemption**
$5.25 million
Maximum tax rate for estate, generation-skipping,
and gift taxes combined
40%
*Wealthy families once avoided paying estate tax twice on the same asset by leaving property to
grandchildren rather than children. To close this loophole, the federal government created the
generation-skipping tax. This tax is imposed at the highest federal tax rate in addition to any estate or
gift tax owed on assets left or given to children.
**The federal government taxes gifts of property between people whether the giver is alive (the gift tax)
or dead (the estate tax). The tax rate is progressive, meaning that the higher the amount of the gift, the
higher the tax rate.
Estate Planning > 9
Estimate the value of your estate
Use the “Your assets” table on
the next page to estimate the total
value of your assets.
Your taxable estate consists of the
value of everything you own, minus
your debts and final expenses.
List the fair market value of all your
assets, remembering that the fair
market value often differs from the
purchase price. You can find the
value of most investments online.
To find the value of your residence,
see how much comparable
properties in your neighborhood
have sold for recently.
If it appears that the taxable
value of your estate could exceed
the estate tax exemption, tell
your lawyer. He or she can build
tax-reduction strategies into your
estate plan. For example, you
might reduce the value of your
estate by making annual tax-free
gifts of up to $14,000 to each of
your children, or by paying for your
grandchildren’s educations.
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Another common way to reduce
estate taxes is to have property
pass to a trust designed to take
full advantage of the federal
estate tax exemption. These are
commonly called bypass or credit
shelter trusts. These types of
trusts can provide for a spouse
and other beneficiaries while
avoiding federal estate tax on
the assets passing in the trust.
Note: The state where you live
may tax your estate, inheritances,
or both. Your lawyer should be
familiar with your state’s laws.
In addition to keeping your family informed, a valuation of your assets may
also help with tax planning if your estate exceeds the federal estate tax
exemption amount.
Your assets
Assets in
your name
Assets in
spouse’s name
Assets
held jointly
Annuities
Business interests
Certificates of deposit
Checking/savings accounts
Collectibles, art, antiques
401(k) or 403(b) accounts
IRAs
Taxable investments
Other investments
Life insurance (face value)
Personal property
(furnishings, jewelry)
Residences (primary and
second homes)
Other
Total
Estate Planning > 11
Make your health care wishes known
You can make your medicalcare wishes known by preparing
an advance medical directive
consisting of a living will and a
durable power of attorney for
health care.
A living will is a document
that spells out the health care
interventions you do or do
not want administered should
you become unable to make
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your wishes known. Hospitals
frequently ask adult patients to fill
out a living will upon admission.
You should also consider creating
a durable power of attorney for
health care. This legal document
also makes your health care wishes
known, but unlike a living will,
appoints someone to make medical
decisions on your behalf if you
cannot make your wishes known.
This person does not have to be
a lawyer. A spouse or other close
family member whom you trust
implicitly to honor your wishes
would be a good choice.
Durable power of attorney
In a similar vein, you can appoint
someone to look after your assets
should you become too ill to take
care of your affairs. A durable
power of attorney for property is
a legal document that authorizes
someone of your choosing to
manage your financial affairs if
you become incapacitated.
An agent’s authority to act on your
behalf ends at your death. Think
carefully about whom you give
this power to as it gives him or her
the right to control your property.
Again, someone you trust to honor
your wishes would make a good
choice for this role.
Consider providing a copy of your
advance medical directive to your
primary physician so it can be kept
with your medical records.
Estate Planning > 13
Your action plan
We’ve broken estate planning down into seven steps. As you
finish each task, record the date it was completed. Aim to finish
the list within six months.
You don’t have to follow this list in order. For example, you could
review your beneficiary designations today.
The best advice is to work through your estate plan one step at a
time. Try not to give up halfway through. Remember, your family
is depending on you.
Although there is no substitute for working with qualified
legal counsel, you can find additional tools and information at
vanguard.com/planyourestate.
Identify your goals (pages 3–4).
H
ave your will made (page 5).
N
ame an executor, guardian, or trustee (page 6).
R
eview your beneficiary designations (page 7).
S
ee how your property is titled (page 8).
E
stimate the value of your estate
(visit vanguard.com/estateassets).
M
ake your health care wishes known (pages 12–13).
O
rganize your important papers
(visit vanguard.com/estatedocuments).
C
reate a list of your important contacts
(visit vanguard.com/estatecontacts).
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Institutional Investor Group
P.O. Box 2900
Valley Forge, PA 19482-2900
Connect with Vanguard®
retirementplans.vanguard.com > 800-523-1188
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