This document is a simplified, executive summary guide to estate planning which points out some key variables to consider in retirement, gift and estate planning. People of different family situation, financial situation, age, future income prospects and financial goals will have all different planning requirements. Nevertheless, below are some key issues that you may want to include in your planning.

Absolute Minimum Documentary Requirement

Anyone who owns property or money has an estate. Whether wealthy or not, one needs to think about what to do with the assets in case the unthinkable happens. This thinking process needs to be documented in the form of “will.” If one’s health deteriorates to a point where he or she cannot make health care decisions such as whether to undergo a surgery or not, one should have left a “living will” that documents one’s desires about life prolonging medical treatments and “health care proxy” that specifies who would make health care decisions. Likewise, for non-health care related matters, one should also have a “general power of attorney” just in case.

Some additional thinking about what to do with one’s financial assets might lead to some legal documents to accompany the “will.” Living trust and other revocable and non-revocable trusts can be useful tools in estate planning.

Current Gift Tax and Estate Tax Combined Exclusion Amounts

One person can give up to $14,000 per year to another person without having to worry about gift tax issue. Beyond this annual de minimis exclusion, there is a lifetime gift tax and estate tax combined exclusion of over $5 million per person. (For year 2013, the exclusion amount is $5,250,000.) There is also an unlimited tax exemption on asset transfers between U.S. citizen spouses. Thus, for a married couple, over $10 million of assets can be bequeathed without having to worry about gift or estate taxes. Please note, however, that some states do not follow the federal laws and have different exemptions.

For Estate Exceeding Gift/Estate Tax Exclusion

If the potential net estate is greater than the lifetime exclusion amount, a serious estate tax planning is a must. If no plan was done, major portion of the estate assets probably need to be paid in taxes. One simple planning tool could be to obtain a term life insurance that would approximately cover the estate taxes. A typical set up would be to establish an irrevocable life insurance trust that would own and pay the insurance premium. Since the policy is owned by a trust, the policy benefit payment would be excluded from the estate for the estate tax purposes. Meanwhile, the benefit proceeds could be used to pay the estate taxes, thereby leaving most of the original assets of the estate in tact.

Retirement and Estate Financial Planning

Beyond the technical details of having to procure various legal documents and planning for the estate tax, it is important to consider some financial planning issues. One’s future earnings prospect, asset management and retirement planning are some of the key issues that need to be considered. Please consider how much you can bring home and for how long. Please also consider what assets you currently have and what your earnings will add to them. Preferably your assets themselves should also be earning income. Thus, if you have rental real property, the property should be adding to your wealth accumulation. If you have financial assets such as cash, stocks and bonds, such should also be adding to your wealth.

With respect to the financial assets, the basic rule of thumb is that safer assets such as U.S. Treasury notes and bank deposits would be expected to earn the least whereas less safe (i.e., more volatility with wide up and down swings) would be expected to earn higher return on investment. Consequently, you should preferably have a portfolio of various financial assets that include (1) cash which earns the least but provides best liquidity, (2) government and bank obligations that gives you interest earnings at relatively low rate of return, (3) possibly corporate debt instruments such as commercial papers and corporate bonds, and (4) corporate stocks. Depending on your assessment of economic and stock market condition, you would be adjusting the ratio of various types of assets held in your portfolio. Generally, if you expect the economy to grow in near future, your portfolio would be heavily loaded with “high growth” stocks. These “high growth” stocks usually are also subject to steep decline in value if the economy suffers.

Another key component in retirement planning would be to invest as much as possible into the qualified retirement plans which enjoys special tax benefits and protections such as 401(k) and IRA accounts. Due to the special benefits granted by tax and other laws, you would prefer to put away as much as your disposable funds into the retirement plans before you invest in other financial assets.

Importance of Insurances