Florida Estate Plan FAQ's

irs gov, Feb 18, 2005

Q. I am 44 years old, recently divorced, with two daughters ages 5 and 9. Should I create a trust for my daughters?

A. Before you decide how to proceed with your estate plans, consult the court order that governs the terms of your divorce.

This court order might prohibit you from fully disinheriting your ex-spouse. The court order might also require you -- if you were the family's principal breadwinner -- to name your ex-spouse as a beneficiary on a life insurance policy, until your youngest child reaches majority age.

These and other possible provisions within the court order might tie your hands -- or set you free to do as you please with your revised estate plans, said Barbara Kahn Stark, a family law attorney based in New Haven, Conn.

If the court order sets no restrictions on your plans to establish a trust for your children, the major challenges are right out of Estate Planning 101.

Identify the assets you'd like included in the trust. Identify your heirs. Identify the terms under which you'd like your heirs to receive your property.

With a trust that names minor children as your principal beneficiaries, you have an additional responsibility: Naming a competent and honest trustee to supervise the management of your children's inheritance.

"The naming of a trustee should not be taken lightly. Quite often, the wishes expressed in a trust are only as durable as a trustee's willingness and ability to carry out those wishes,'' Stark said.

Can this person competently manage money? Is he or she willing to do the job? Will you pay this person for his or her efforts? Those are just a few questions one should ask when choosing a trustee, Stark said.

Beyond the basics -- naming of assets, heirs, terms and a trustee -- it's also important to inspect the "beneficiary forms" you filled out for your IRAs, 401(k), 403(b) and 457 retirement savings plans. Annuities, pension plans and life insurance policies are also governed by beneficiary forms -- documents that are powerful enough to override wishes spelled out in a will or trust agreement.

Make a mistake in these forms -- such as naming your ex-spouse as a beneficiary, or failing to properly title the name of your trust -- and a sizable portion of your estate could be left to someone other than your children, Stark said.

Q. I am just getting started in mutual fund investing. Where can I find information on how these investments will be taxed?

A. Start by calling the customer service department of your mutual fund company.

Many mutual fund companies provide excellent, easy-to-understand guidebooks for handling the taxation of your fund-related income.

Mutual funds generally distribute three different types of income: interest, dividends and capital gains. These sources of income are reported on IRS Form 1099, which you're likely to receive in late January or early February of each year.

Each of these sources of income, in a given year, can be taxed at different rates, depending on your so-called tax bracket. Each category of investment income is entered on a different line of your IRS Form 1040: See lines 8a, 8b, 9a, 9b, 13a, and 13b on the 2003 Form 1040 -- the "front page" of many federal tax returns.

Ask for, or prepare to download, the following publications by number: Publication 17: Your Federal Income Tax; Publication 550: Investment Income and Expenses; Publication 551: Basis of Assets; Publication 552: Record-keeping for Individuals; Publication 564: Mutual Fund Distributions; and Publication 590: Individual Retirement Arrangements, if you hold mutual funds inside an IRA or other tax-deferred investment account.

"The Ernst & Young Tax Guide 2004" also is a handy reference source to have around the house. Many simple tax questions are answered in this book.