Contrary to popular thought, estate planning isn’t a “tomorrow” issue. Actually, estate planning is a guide for today. As business management guru Peter Drucker puts it, “Long-range planning does not deal with future decisions, but with the future of present decisions.” More to the point, in the words of diamond philosopher Yogi Berra, “if you don’t know where you’re going, you could wind up someplace else.” That’s especially true of estate planning. Decisions made – or not made – today will surely impact your loved one’s financial security down the road.

So what’s estate planning? And how does the property you own impact the state planning strategy? Let’s take these issues one at a time.

What is Estate Planning?
Estate planning allows for the transfer of an individual’s estate upon death to that individual’s chosen beneficiaries. By establishing an estate plan ahead of time, you can minimize taxes and estate fees, direct your estate to beneficiaries of your own choice (and not some probate judge in the state you reside), establishes a crystal-clear plan on what happens with your home, your investment portfolio, your insurance policies, your business, or your employee benefits. It also establishes a plan for any properties you own besides your family home.

What Is An Estate?
While estate property laws vary from state to state, by and large, an estate is defined as all of the property an individual owns, be it in the individual’s name, in a partnership, in a joint-ownership pact, or through a trust. A short list of estate planning items would include:

• Your family property, including your home and any other buildings (like a barn or guest-house, located on the property)
• Any additional properties, like vacation homes, rental homes, commercial buildings, or undeveloped land
• Personal property, like investment, insurance, and retirement accounts, cars, furniture, jewelry, collectibles, cash, and pension benefits
• Any business interests, such as property owned, ownership shares, and inventory

How Much Can You Owe in Estate Taxes?
In terms of estate taxes and personal property, the more you can shield from Uncle Sam, the better. Congress has helped a bit on that front, passing new estate tax laws that allow you to leave $2 million tax-free to your heirs in 2007 and 2008, and $3.5 million in 2009. Under the law’s “sunset” provision, however, those numbers could be reduced in 2010, when the estate planning tax laws could be repealed. Once you get past the $2 million estate tax allowance, the road gets tougher. For every dollar you leave behind, the Internal Revenue Service will take 45 cents – if you let them (see chart below).

Source: Internal Revenue Service

What Does Real Estate Have to Do With Estate Planning?

In a word, plenty. Real estate, in the form of your family home, second home, real estate investments, and real estate investment trusts (REIT’s) and other property-related investments, often comprises the bulk of an individual’s estate. In many cases, the family home is the estate holder’s primary financial asset. As such, it must be protected. Tax issues come into play, as well. While cash and investments can easily be passed down to your heirs, not so with real estate property. There, the I.R.S. has erected multiple tax barriers that can be difficult to pass. So knowing what issues confront you as a property owners is half the battle in erecting an I.R.S.-proof estate planning Some key issues with real estate and estate planning are: Establishing Who Owns What? – The name that appears on the ownership properties has everything to do with your estate planning options. If your real estate assets are titled properly, you can minimize taxes and tee up your heirs for an easier exchange of property after you are gone. How to Title Your Home – By and large, most married couples have both names on their primary home ownership papers. The primary reason for doing so is to ensure that, after your death, your family home will pass directly to your spouse, normally on a tax-free basis. And if your surviving spouse opts to sell the house, he or she will likely be able to do so while avoiding onerous capital gains taxes. Leaving Your Family Home to Your Heirs – There are about half a dozen ways to leave the family home to your heirs, some of them more tax-friendlier than others.

You can:

• Sell on the Cheap - Some folks like to sell their homes to their kids at a bargain-basement price. That’s okay – just know that you’ll probably be using up much, if not all, of your annual gift tax exclusion, and there will probably be some taxes left to pay once you get outside the protective cocoon of the gift tax exclusion.
• Stay in the Home – If your estate value falls below the magical $2 million mark, this may be your best options. In most cases, the home can be bequeathed to your heirs on a tax-free basis.
• Gift the Home – You can move out of the home and “gift” it to your heirs, but know that you may be setting your loved ones up with a hefty tax bill in the process. In most cases, gifting your home to your children is a taxable event, especially if they decide to sell the property. Plus, you’ll be whittling away at your $2 million estate-tax allowance, as that amount is reduced, dollar for dollar, by gifts in excess of the annual exclusion amount.

Benefiting From a Qualified Personal Residence Trust – The best way to make an IRS-approved gift of your home to your heirs is through a qualified personal residence trust (QPRT) - - without having to move out. The QPRT allows the homeowner to place the home in a trust, while continuing to reside in the property. The I.R.S., based on a complex formula involving interest rates, the age of the property owner, and the length of the trust, can knock off up to half the property’s taxable liability, while at the same time paving the way for your heirs to own the house someday.

Managing Rental Properties Through an LLC – Many real estate investors who own property they want to pass on their heirs use limited liability companies to protect their assets from taxes. For federal tax purposes, the single member LLC is considered a "disregarded entity," so there is no separate income tax return for property you own, making it a cost-efficient and convenient estate planning mechanism.

The Takeaway - There is no shortage of strategies to pass along real estate property to you heirs and, at the same time, protect you and your loved ones from high tax bills, prying probate court judges, and expensive attorney fess. In future blogs, I’ll go into greater detail on how some of the property-protection strategies mentioned above can provide peace of mind when it comes your estate planning needs.