Transferring assets tax-free: 2006 update - VanguardTransferring assets tax-free: 2006 update New tax law increases gift tax exclusion limits Thanks to changes in the 2006 tax law,

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.


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.

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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


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


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


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.


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.


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.


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.



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•


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)


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.


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


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.


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


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.


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.

Facts on Funds, Financial skills for life,Flagship, PlainTalk, The VanguardDifference, The Vanguard Group,Vanguard, Voyager, and the ship logo aretrademarks of The Vanguard Group, Inc.All other marks are the exclusiveproperty of their respective owners.

Vanguard Personal Financial PlanningService is provided by Vanguard Advisers,Inc., a registered investment advisor.Vanguard Asset Management Servicesare provided by Vanguard National TrustCompany, which is a federally charteredtrust company operated under thesupervision of the Office of theComptroller of the Currency.

World Wide Webwww.vanguard.com

Toll-Free Information1-800-962-5258

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Documents

Transferring assets tax-free: 2006 update - VanguardTransferring assets tax-free: 2006 update New tax law increases gift tax exclusion limits Thanks to changes in the 2006 tax law,