Who needs an estate plan?

NEA Today, Jan 1999

You're never too young or too poor to plan for the hereafter.

Who:

Carlos Villarreal, Jr., age 44, electronics technician for the San Antonio, Texas, Independent School District

Financial Goal:

To develop an estate plan

Game Plan:

Villarreal, who is divorced and has three grown children, admits that he has done very little when it comes to estate planning-in part because until recently, he didn't think he was old enough to need a will, let alone an estate plan.

"Now I'm nearing 45, and I realize I haven't looked to the future," Villarreal says. "Like a lot of people, I've avoided thinking about my own death and what would happen to my family afterwards. And I've always assumed I didn't have that much to pass on to my children, so I didn't need to worry about a will.

"I have a life insurance policy, and my kids are the beneficiaries," he continues. "For a long time, I figured that was the best I could do for them. But I need to think about doing more."

The Experts Say:

If you think you're not old enough-or you don't have enough property-to need an estate plan, think again. Your age and net worth have nothing to do with why you should have a plan.

At the very least, you need a will to make sure your assets are distributed according to your wishes and to select a guardian for your minor children. If you die without a will, these decisions will by made by state law and judges.

Without a will, some of your property may not go to your spouse, but directly to your children. The problem with children inheriting directly is that the surviving parent may need to get court permission to manage the money -a waste of time and money in most families.

To save your family the cost and hassles of probate court proceedings after your death, think about creating a revocable living trust. It's no more trouble than writing a will, and it lets everything go directly to your heirs after your death, without taking an expensive detour through probate court.

While you're alive, the trust has no effect, and you can revoke it or change its terms at any time. But after your death, the person you chose to be your "successor trustee" takes control of trust property and transfers it according to your instructions. It's quick and simple.

There are other, even easier ways to avoid probate as well as estate taxes.

You can turn any bank account into a "payable-on-death" account simply by signing a form and naming someone to inherit the account at your death. You can do the same thing in many states with securities.

To reduce estate taxes, give away property before your death. You can give any number of individuals gifts of up to $10,000 a year ($20,000 for married couples giving joint gifts) tax-free. Gifts larger than $10,000 are subject to gift tax. Gifts to your spouse, gifts to pay for tuition or medical bills, or gifts to a tax-exempt organization are exempt.

Create certain kinds of trusts, such as the AB trust. Each spouse leaves property to the children-with the crucial condition that the surviving spouse has the right to use the income that property produces for as long as he or she lives.

In some circumstances, the surviving spouse may even be able to spend principal. By 2006, an AB trust will shield up to $2 million from estate tax.

Should I convert my deductible IRA to a Roth IRA? What are the qualifications for conversion?

In case you've missed all the hoopla surrounding Roth IRAs, here's the scoop: You invest aftertax money, watch it grow tax-free, and pay no taxes when you tap the account after age 59 1/2 .

You can contribute up to $2,000 a year-$4,000 for couples-if your adjusted gross income is $95,000 or less for singles and $150,000 or less for married couples filing jointly. Your contribution isn't tax-deductible.

Unlike other IRAs, Roths don't require that you start tapping your account at age 70 1/2, and you can keep contributing as long as you have earned income. After five years, you're allowed to withdraw up to $10,000 tax-free for the purchase of your first home.

You can convert your existing IRA to a Roth IRA if your adjusted gross income doesn't exceed $100,000. You will, however, have to pay taxes on your earnings and, if the IRA was deductible, on the original contribution.

Experts suggest that it may be worth converting if you're a long way from retirement and you can afford to pay all the taxes from conversion from another source. They also recommend a rollover if you're confident that you'll retire to a tax bracket above or slightly below the one you're at now. If you think you may be in a much lower tax bracket, the traditional IRA may be a better option for you.