If you do not prepare a will, the state will draw one for you, and chances are very good that your survivors will not like the provisions. The legal term for dying without a will is “intestacy,” and the distribution of your property will be based on the intestacy laws of the state in which you reside at the time of death.

In the absence of a will, the Probate Court will appoint an administrator, such as a family member or local attorney. Then after a complicated procedure, all of your assets will be distributed according to the state’s formula.

Your estate consists of personal property (furniture, jewelry, clothes, automobiles), investments (cash, savings, securities), real estate, employee benefits (group insurance, retirement or profit sharing) and other items such as the proceeds of a lawsuit against someone who accidentally caused your death.

You cannot rely on joint property title as a substitute for a will because it does not solve problems arising with the second death. Some forms of joint title do not pass entirely to the surviving spouse.

Having a will drawn can prevent family disputes, and will give you the opportunity to be certain that your property will be distributed promptly to the parties designated as beneficiaries.

Your will should designate an Executor to carry out your bequests efficiently and promptly and with less expense than if there had been no will. The will should also provide for flexibility in the administration of your estate. You may also wish to provide special bequests to non-profit organizations.

Having a will prepared will also help establish a relationship with an attorney, which could be extremely valuable in the future. Naturally, a will should be periodically reviewed and updated to reflect changing personal circumstances and new tax laws.

The federal estate tax may or may not become history after 2009; Congress is debating its fate. Meanwhile, it remains a subject worth tackling because no matter what your age or who is in charge of Congress several years hence, it’s better to be ready than to be caught unprepared.

All plans to minimize estate taxes revolve around a few basic rules:

• All property that passes from you to your spouse is shielded from the estate tax by the marital deduction
• Every estate is currently entitled to an exemption of $2 million from the tax
• Property you inherit comes to you with the new tax basis, equal to its value at the date of the descendant’s death
• Where property has been held in a married couple’s joint name (“with the right of survivorship” or by the entirety”) so that it belongs to the survivor automatically, only half its values is deemed to have been inherited by the survivor and acquires a new basis. (An exemption for property you may have bought in joint name before 1977 gives the surviving owner new tax basis for 100% of the property)

The $2 million exemption makes it possible, with some planning, for a married couple to leave $4 million free of tax to their inheritors. Here’s how it’s done.

Assume John leaves his entire $5 million estate to Mary, his wife, who, thanks to the marital deduction, gets it clear of taxes. The rub: When Mary leaves the property to the children, they face taxes shielded only by the $2 million exemption, with the balance exposed to tax rates that run up to 46%.

Our couple could have done better. Suppose John had left $2 million to a trust that will pay Mary the income (plus as much of the principal as she might need to maintain her accustomed lifestyle) during her lifetime, after which any remaining assets of the trust would be paid to the children. The balance of John’s estate could be left to Mary outright. No tax would be due from John’s estate, the marital deduction shields the $3 million left to Mary, and the exemption covers the $2 million trust.

The payoff on the plan is realized on Mary’s death, when the trust fund “bypasses” her estate and goes directly to the children. The trust is not considered part of her estate simply because she didn’t own it. So Mary’s estate amounts to $3 million, of which $2 million is insulated by her own exemption. Thus only $1 million (compared with $3 million in the earlier example) of John’s $5 million estate is hit by the tax, which could mean that close to $1 million will be left to divvy up among the children.

If our imaginary couple had sufficient wealth for Mary (still assuming she’s the surviving spouse) to forego the income from the tax exempt $2 million trust fund, they might consider skipping the trust, then, John could leave that $2 million to children or other heirs.

For many couples, estate planning consists of keeping all their property in joint name. As a form of ownership, it is simple, it avoids the cost of having wills prepared as well as the expenses of probate and estate administration, and since the whole fortune goes to the spouse, estate taxes don’t enter the picture.

But the above “plan” passes the estate tax problem on to be reckoned with at a future date in Mary’s estate, which will include $2 million that could have been exempt by a provision in John’s will. Hundreds of thousands of dollars might be thrown away along with the available exemption.

Another opportunity forfeited in this example involves the basis step up from inherited property. Let’s say the couples jointly held property, worth $5 million, that has a $1 million tax basis. When Mary, as the surviving owner, comes into the $5 million of assets, $2.5 million is deemed to have belonged to her originally, and retains its $500,000 basis; the balance is stepped up to its $2.5 million value at John’s death. Mary now has $5 million in securities or other property with a $3 million tax basis- the sale of which would mean taxes on a $2 million recognized gain.

Note that any gain realized by the surviving joint owner on a sale of the family home could be offset by the $250,000 exemption.

The point is that joint ownership of the couple’s assets is not the most tax-effective way to go. However, since any amount of property can be transferred between husband and wife free of gift tax, it is a simple matter to allocate their holdings so that they can be disposed of by will. If it appears that a particular spouse is not likely to be the survivor, the bulk of the couple’s property (or at least enough to fund the $2 million exemption), should be a held in his or her name.

While this may be of little concern while markets are rising, the basis according to inherited property (its fair market value at the date of death) is not necessarily “stepped up”. Paper losses on securities held by the decedent will mean a reduced basis to the new owner, wiping out any income tax benefit the decedent could have by realizing the loss. So take your losses- don’t leave them to your heirs.

Finally, think twice before making gifts large enough (above the $1 million lifetime exemption) to incur a gift tax, before the fate of the big estate tax has been determined. Any gift tax you pay will have been wasted if the estate tax expires.

Note by Paul Ferraresi: An easier alternative to the above examples is to set up a Living Trust. More on that later…

• The will names an executor and, if you have children under 18, is essential for naming a guardian. A will is not the best document to use. The time delays and probate costs hurt the family almost as much as the departed loved one. If you have gross asset values (no deductions for liens or encumbrances) in excess of $100,000 it makes economic, business and emotional sense to have a Living Trust drafted (Revocable Intervivos Trust).
• Items to include are a net worth statement, contact list of relevant parties, last wishes, valuables list and a key documents reference for originals.
• Arrange for a financial institution to hold them. This will keep assets from being overlooked when the estate is settled.
• Another option is to set up an investment account with pay-on-death designation to the executor.
• Ethical wills can tell a family history, share values, explain estate planning decisions or express feelings toward family members. Two sites that offer helpful advice are www.ethicalwill.com and www.personalhistorians.org.
• At least once every five years, you should meet with everyone significantly involved in the estate. At a minimum, this would include the executor, trustees and primary heirs to make sure there are no surprises later on.

One of the first steps in this whole process is to assess your values before you value your assets. Next, you should follow an Empowered Wealth System and, lastly, develop a Family Empowered Bank. Going through this experience will be one of the most insightful experiences you go through. Each client I work with on these steps are forever greatful.