Simple estate planning

Money Magazine recently covered the basics of estate planning. First, understand how the estate tax rates are going to change over the coming years.

In 2009 the federal exemption - the amount of an estate not subject to a 45% federal tax - has increased from $2 million to $3.5 million for individuals. This move is the result of a 2001 law that continually increased the limit for the eight years following. Oddly, the law calls for estate tax to be eliminated in 2010, then to revert back to 2001 levels ($1 million with a 55% tax rate above that) in 2011.

So, as of right now, you only have to worry about estate taxes if your estate is going to be over $3.5 million when you shed this mortal coil. However, even if your estate won't hit this level of assets, you should have an estate plan.

You need a will to make sure your inheritance plans are carried out as you instructed. Money recommended the site, aaepa.com, to help you find an estate planning attorney. You'll also want to do whatever you can to avoid probate. Why?

"It's not unusual for a $1 million California estate to generate $23,000 in probate fees," says Liza Weiman Hanks, a San Jose estate attorney and author of "The Busy Family's Guide to Estate Planning."

Some other things to understand; living trusts, 'pour over' will, irrevocable life insurance trusts, bypass trusts and disclaimer bypass trusts (read the fine article).

I'll describe irrevocable life insurance trusts to pique your interest. Normally, if you designate someone other than your spouse as the life insurance policy beneficiary, such as a child, the benefits paid will be taxed as being part of your estate. However, if there is a policy that covers you but that you don't own, the benefits shouldn't be subject to your estate taxes.

Enter the irrevocable life insurance trust. You set it up and the benefits are paid to the trust, free of estate taxes. There are some big caveats, however. For one, after the trust is established, you can't change the beneficiaries. This is part of the reason it's called irrevocable.