Estate Planning From Your Spouse’s Perspective

A goal of most estate plans is to provide financial security for the spouse; but not all plans accomplish that goal. This special issue of Insight examines estate planning from the viewpoint of the surviving spouse.

From titling assets to charitable contributions, there are a variety of concerns and options to consider when developing an estate plan that protects the long-term interests of your spouse and family.

(For simplicity's sake and because, statistically, women outlive men, this article will assume the wife is the surviving spouse. However, the concepts of good estate planning for a spouse's benefit apply equally to men and women.)

Communicating your intentions to your spouse and making sure you both know and understand details of your finances may seem obvious first steps. However, it is amazing how many couples, who wouldn't consider planning a vacation without input from their spouse and family, embark on the estate planning process with assumptions, not clearly defined specifics, about each other's wishes and goals for the future.

Unless you share your feelings and discuss these important issues, your estate plan may prove to be confusing and potentially harmful to your spouse in the long term.

It is not uncommon for wives to defer to their husbands in matters of household finances and investments, even to the point where they have no concept of their holdings at all. Not only is this unwise, it can be detrimental to your wife's future interests. At minimum, lack of involvement in your finances will place her at a distinct disadvantage when the time comes for her to manage on her own.

One way to begin understanding each other's intentions and goals is to address specific objectives and areas of concern by completing simple, open-ended statements with responses that reflect and express your true feelings. Here are a few examples to get you started:

"I want to leave my wife enough money so that . . .
(she can travel to Europe once a year; she can convert the barn into an art studio and paint to her heart's content; she can stay with her sister in Florida every winter . . .)."
"I want our children . . .
(to be able to buy a vacation home; to earn most of their income; not to worry about financing their children's college education . . .)."
"I want other members of our family (sisters, brothers, nieces, nephews, etc.) to have . . .
(specific property; my retirement account assets; nothing . . .)."
"If my wife becomes ill . . .
(I want her to be taken care of in her own home; I want her to have the financial freedom to choose where and from whom she receives care . . .)."
"When my wife passes away, I want to be sure our disabled son . . .
(maintains his independence at home; has access to quality institutional care for the remainder of his life . . .)."
"It is important to me that specific charities receive . . .
($1,000 each; my art collection; the residue of my retirement plan . . .)."

Together, you and your wife can craft similar statements to engender discussion about other issues unique to your personal situation, such as providing for children from a previous marriage or designating family heirlooms appropriately. You should also discuss items with special sentimental or monetary value, and make sure your intentions are conveyed within your estate plan.

Once you have discussed each of your goals, you should review details of your financial situation with your wife. Ask her if she feels capable of handling her affairs without you, either by herself or perhaps in conjunction with someone you both know and trust.

If she lacks confidence in her ability but is willing to learn, suggest she take a class, read books and educate herself about basic terms and concepts. Encourage her participation in your routine money management practices and use that as a basis to gradually increase her involvement in more complex financial matters. Impress upon your wife how important it is to her future well being that she understands the financial aspects of your estate as thoroughly as possible.

When you and your wife have finalized your plan, discuss it with your children and other appropriate family members. It will likely be easier for your wife if you both explain your intentions to your family now, rather than leaving the task to her alone after your death.

Also, your family will have the opportunity to ask questions, obtain information, and make any necessary arrangements of their own. Presenting your plan to your family in advance will "get everyone on the same page," and can also help avoid misunderstandings or even disputes later on.

No matter how well intentioned, an estate plan drafted without the active participation of both spouses may not be in your wife's best interests. By discussing and communicating to each other your thoughts, goals and concerns, you will be able to formulate an estate plan that not only works well, but also provides peace of mind for you both.

Deirdre and Felix, an NAS member, were relieved to meet with their estate planning attorney to finally put their affairs in order -- but for different reasons.

They hadn't discussed specific details of their long-term goals, but did agree in general on a plan that would enable them to help their children and grandchildren financially, enjoy traveling, and use their money to benefit community and charitable organizations. Beyond these common objectives, however, they approached the estate planning process from very different points of view.

Felix had assembled an impressive investment portfolio and sought confirmation that his careful planning would provide the security he wanted for his family. To prevent his wife from worrying, he handled all their financial matters, from paying the mortgage to tracking their retirement plans.

Deirdre, vaguely aware that financially they were "all right," was anxious to finalize their arrangements so that she "wouldn't have to worry about it any more." Added to her nervousness was the fact that she had never met their attorney, but, recalling Felix's 10-year relationship with him, she relied on her husband's judgment.

At their meeting, the attorney raised important issues that Felix and Deirdre needed to resolve before proceeding. In addressing those issues, they discovered that many of their assumptions about each other's intentions were incorrect. Here are a few of them:

Felix assumed that Deirdre wanted to remain in the family home when he died. Deirdre thought he knew she planned to sell the house and move in with their daughter.
Deirdre assumed she and Felix would fully fund their grandchildren's college education; Felix determined it best for them to "make it on their own," and planned to set aside only a small reserve for this purpose.
Felix wanted to gift a portion of his IRA to the NAS; Deirdre worried about having enough money to live on if he "gave away" their savings.
The thought of having to manage large holdings by herself intimidated Deirdre. Felix hadn't realized Deirdre was uncomfortable handling financial matters, and became concerned that she planned to relinquish control of her affairs to their son-in-law.

Felix and Deirdre thought about the issues their attorney's questions brought to light, and took action.

Their first step was to talk about why their viewpoints varied on such things as their grandchildren's education fund and Felix's gift to the Academy. After discussing their different perspectives, they found a compromise that pleased them both.

Deirdre was surprised and flattered that Felix expected her to manage the estate, so she next set about learning basic financial concepts and terminology. Finding that Deirdre was less apt to worry if given a measure of control, Felix reviewed and explained details about their finances to her, which further increased her confidence and helped alleviate his concerns about her ability to manage without him.

Both spouses' active participation in their finances and in the planning process led them to share more thoughts and ideas. Armed with new insights, after two subsequent visits with their attorney, Felix and Deirdre finalized a plan that fulfilled their financial and personal goals, and that Deirdre -- assisted by their attorney -- now feels empowered to manage.

One of the most important aspects of estate planning is how your assets are titled -- that is, who is listed as the legal owner of your homes and other real estate, retirement accounts, insurance policies, and other assets.

Who owns what becomes vitally important when your estate is distributed -- it will affect not only your wife, but also your family and other heirs. If your assets are titled properly, you can minimize taxes for your wife as well as set the stage for your heirs to maximize their inheritance and minimize high estate taxes.

When looking at who owns what, think about how your assets will be distributed to your wife after you die. Then think through how her assets will be distributed to your family and other heirs after her death. Look beyond your present and future needs and those of your wife, and think one more step ahead. Consider your intentions for your family.

You can plan ahead now to maximize benefits not just for your wife, but also for your family and other heirs. The way your assets are transferred to your wife will increase her options and tax-planning flexibility -- in other words, it will help control how much of your wealth is given to your family, and how much is turned over to the government for taxes.

As part of your planning process, you should make a list of all your assets -- your residence and vacation home(s), business interests, bank accounts, retirement plans, insurance policies, brokerage accounts, and any other property you own that has monetary value.

The next step is to look at the way the assets are titled, that is, who owns what. Both you and your wife may be listed as joint owners of some assets -- for example, you both may hold the title to your primary residence -- while some of your property may be titled in one of your names alone.

Ideally, your estate should be "balanced," with each spouse the legal owner of enough assets to take advantage of the "free money" the government gives you through the applicable exclusion amount, the amount you can pass on without incurring estate taxes.

Due to the provisions of the Tax Reform Act of 2001, this exclusion amount increases from $1 million in 2002 to $3.5 million in 2009. (See this chart for details.) This means that in the year 2009, you can designate up to $3.5 million of your assets to beneficiaries without incurring taxes on this amount. Because these amounts are changing from year to year, it is wise to adjust your plan to keep pace with the annual increases.

If all your assets are in both spouses' names and titled jointly, they pass directly to the surviving spouse and are not taxed, due to the "unlimited marital deduction." This means that there is no limit to the assets that can be transferred, tax-free, from a husband to a wife, and vice-versa.

However, this arrangement can limit your wife's options when planning her estate to benefit your heirs in the future. Another considerable disadvantage is that it doesn't allow you to take advantage of the significant tax benefits of the "individual exclusion amount" (up to $3.5 million) you can apply for the benefit of your heirs.

Tom and Lisa have a $5 million estate. If Tom dies in 2004, $1.5 million (the applicable exclusion amount that year) could pass tax-free to his children, with the remaining $3.5 million going to Lisa, also tax-free (because of the unlimited marital deduction). Then, if Lisa dies in 2009, the remaining estate could pass tax-free to their children again, because the applicable exclusion amount for 2009 is $3.5 million.

Unfortunately, since all of the assets are jointly held in the names of Tom and Lisa, the assets pass directly to Lisa upon Tom's death -- regardless of what Tom's will says. There is no estate tax at this time because of the unlimited marital deduction, but the children receive nothing. When Lisa dies, the children will receive the $5 million estate, but estate taxes will be due on $1.5 million ($5 million - $3.5 million, the applicable exclusion amount).

Jointly owning all their assets could cost Tom and Lisa's heirs hundreds of thousands of dollars.

Most couples have their home titled in both of their names, for several reasons. For one, knowing that your family home will pass directly to your wife is reassuring. At least in the short term, it means that your wife will not be displaced or experience a change in her lifestyle, and she will have a substantial asset, the value of the house, at her disposal if needed.

There are other financial benefits also. When the husband dies, the house passes outright to his wife, tax-free. She can deduct the mortgage interest and real estate tax from her income tax, and if she sells the house, she may be able to avoid capital gains taxes.

But what happens to your home after your wife dies? This is a good example of the importance of thinking through your estate plan.

Let's say you and your wife agree to leave the house to your children after you both die. Because the value of your home is considerable, removing part of that value from your overall estate would ease your children's tax burden. One way to accomplish this would be for your wife to establish a Qualified Personal Residence Trust, or "QPRT". (You can also structure a QPRT using a condominium or vacation home.) Here's how it works:

Your wife transfers ownership of the house into a trust, naming one or all of your children as beneficiaries. She maintains the right to live there rent-free for a specified time, usually between 10 - 20 years.

When the designated time period ends, the house can either be maintained in the trust for your family, or it can be distributed outright tax-free to your beneficiaries, depending on the terms of the QPRT. If your wife is still living when the designated term is over, she pays fair-market rent to the beneficiaries (your children).

At the time the QPRT is established, gift taxes are calculated using the fair market value of the home minus the value of your wife's interest (calculated using your wife's age and the length of the trust). Your wife's applicable exclusion amount -- which covers lifetime gifts, as well as gifts at death -- may cover the discounted value of the home, resulting in no gift taxes due.

Regardless, because the fair market value is determined at the time of the creation of the trust, rather than at your wife's death, your children receive the benefit of any appreciation in value with no additional tax liability.

It is important to underestimate the owner's life expectancy when structuring a QPRT, because if she dies before the term is over, the home will be included in her estate at full fair market value. (For tax purposes, it's as if the trust never existed.) Your wife should also be sure she has enough income to live comfortably, because the equity in the house will be unavailable to her.

At Tom's death, the family home, valued at $1 million, passed directly to Lisa, who created a QPRT naming their daughter Erin as beneficiary. Based on Lisa's age at the time and the length of the trust, the gift was valued at only $150,000 for tax purposes, easily falling under the applicable exclusion amount.

Lisa continued to live in the home for 15 years, after which ownership of the house transferred to Erin. Lisa paid a modest rent to Erin until Lisa's death a year later.

Erin inherited the house, by then valued at $2 million, with no additional tax liability. Without the QPRT, the entire $2 million would have counted against the applicable exclusion amount -- or would have been vulnerable to estate taxes.

Estate planning should always be undertaken thoughtfully and carefully, but this is especially true if you and/or your wife have children or assets from a previous marriage. Otherwise, the risks are tremendous: an error in your estate plan could mean that either your wife or your children could be left with much less than you intended or than they expected. Not only will this undoubtedly lead to strained family relationships, it may even bring your wife and family to court to resolve their issues.

So that you do not unknowingly disenfranchise your wife or any of your heirs, and to be sure that your children obtain their rightful share of your legacy, you should discuss together the whole array of special considerations that apply in your case.

If appropriate, your first step should be to review your divorce decree to determine if any stipulations were put in place at the time of your divorce that will affect your planning going forward. For example, the judgment may declare that an ex-spouse retains the rights to a retirement account, or that you need to maintain a life insurance policy to benefit your ex-spouse or children from a previous union. Since you cannot change these stipulations, they must be considered when making overall estate planning decisions.

As you continue "thinking through to your heirs," the way your assets are titled become very important. For example, many couples agree that it is appropriate to pass assets from a previous marriage to their children and heirs from that union, and to reserve their mutual estate assets for children and heirs from their current marriage. This may not happen if assets are titled inappropriately.

Estate planning becomes more complex when dealing with "blended families," but an experienced financial advisor or tax attorney can assist you in developing a plan that is appropriate and fair to you, your wife, and heirs. Make certain that your advisor is aware of your special considerations, so he or she is able to suggest the best course of action and to produce an estate plan that reflects and fulfills your intentions. Bring any paperwork or official documentation with you for your advisor to review to make sure any judgments and previous agreements are interpreted correctly and accurately.

One of the planning strategies that can be ideal for estates in "blended families" is the Qualified Terminable Interest Property ("QTIP") trust.

The QTIP trust provides income to your wife after your death, but ensures that the property in the trust passes to your designated beneficiaries upon your wife's death. Both you and your wife can add this provision to your wills so that you both protect your beneficiaries, no matter who is the first to die.

You can set aside funds that will provide full income for your wife, or a specified amount payable to her annually to take care of any health, education, maintenance or other support that she may need. Also, because your assets are placed in the trust, they are protected against any claims that might arise from creditors. At the end of your wife's life, any remaining proceeds from the trust pass to your other beneficiaries and are included in your wife's estate.

Another important consideration in safeguarding the future interests of your wife is the selection of individuals to carry out the provisions of your will. These estate administrators are called "fiduciaries," and, depending on the terms of your will and its complexity, there can be several fiduciaries responsible for different aspects of managing your estate.

The Executor is the personal administrator who works with your spouse and family, along with your financial advisor or accountants, to settle your estate according to the wishes expressed in your will.

Trustees are involved if your will establishes trusts. The trustee manages the money in the trust, making investment decisions that affect the value of the trust distribution decisions based on the terms of the trust. It is often advisable to choose experienced money managers who may be relied upon to make decisions that will uphold the value of the trust, and therefore not decrease the potential to provide income to your beneficiaries.

(You can establish a trust naming your wife as the Trustee. However, you should discuss with your financial advisor the best way to structure this trust in order to avoid any possible negative tax consequences your wife may experience in this case.)

These fiduciaries will be integrally involved in managing the monetary aspects of your estate, and therefore your wife will rely on them for much of her financial well being. It is crucial that you mutually select administrators that you both feel comfortable with, and can trust completely.

Consider the size of your estate and the complexity of your will. The person(s) you appoint to manage your estate should have worked with estates of roughly the same size as yours and be experienced in the family and business matters of concern to you.

It is also important that you and your wife feel personally comfortable with this person, and that he or she takes the time necessary to help you understand your options and their consequences clearly.

Remember that your wife will be dealing with this person in the future. You need to judge whether the administrator's style and abilities complement your wife's capacity and personality. In addition to talking to your wife about how she feels about a potential administrator, do some observation on your own:

Does your wife take the initiative to ask questions?
Is she fully satisfied with the answers she receives or just reluctant to ask a follow up question?
Is the administrator patient?
Does he or she direct answers to you or your wife when your wife poses a question?
How comfortable are you about entrusting the management of your estate, and the future interests of your wife, with this person?

Not only should your wife be fully informed and assist in the selection of your fiduciaries, she must also feel comfortable with them.

Even if she currently is happy with your mutual choice, your estate planning documents should include provisions that permit your wife the flexibility to change these administrators if she wishes. Without adequate provisions for change, she can be left in an uncomfortable or potentially conflicting arrangement.

Suppose, for example, you designate your wife and the bank as your executors and trustees of all trusts. Your wife is comfortable with the bank officers, so your will contains no provision allowing her to remove and replace the bank.

If at some future time, the bank officers change and your wife decides to move her assets to another bank, the bank you named in your will may not wish to relinquish its right (and the fees generated) to serve as administrator of your estate. Unless your will specifies that your wife has the right to change administrators, switching banks may place your wife in a conflicting relationship between the original bank and the new bank your wife desires to use.

In many ways, what to do with assets from 401(k), 403(b) or IRA retirement plans can present the greatest challenge in estate planning.

While the tax-deferral opportunities are undeniably worthwhile, unless carefully handled, these plans can pose tremendous tax liabilities for your wife, your children and other heirs. The potential hit from estate and income taxes can be as much as 75% of the unused balance.

Usually, spouses are designated as "default" beneficiaries of retirement plan assets. This means that unless otherwise specified, your wife is automatically named the beneficiary. (If you are married and wish to designate a beneficiary other than your spouse, your spouse must provide his or her written consent.)

As the primary beneficiary of your qualified retirement plan assets in the event of your death, your wife has several options with regard to those funds:

She can simply accept a lump sum payment for the total amount, and spend it as she sees fit; however, she will have to pay all the deferred income taxes. These taxes can be significant, and generally speaking, are not the best use of these funds.
She can accept a lump sum payment for the total amount, and use it to fund a trust or an annuity that will provide her a stream of income for a term of years or throughout her lifetime. Depending on the structure and beneficiaries of the trust or annuity, this strategy may help reduce or possibly eliminate the taxes that would otherwise result when the funds are paid out to her.
She can "roll over" the funds into an IRA of her own, and no taxes will be immediately due. These funds will remain in her IRA on a tax-deferred basis. But she will pay taxes on the amounts she withdraws later on; and her heirs may pay a sizeable tax on the IRA funds remaining after her death.

Another option available to your wife, if she believes she won't need all of the funds from the IRA during her remaining years, is a "Stretch IRA." It's a way to stretch the tax-deferred growth of your retirement plan assets as far into the future as possible, and can provide tax savings to your heirs. This technique may be ideal if you have multiple retirement plans or a plan with high asset balances.

Here's how it can work: at your death, your wife rolls over the funds from your IRA into a new or existing IRA in her name, and designates your son as the beneficiary.

When your wife dies, your son inherits any remaining funds, but instead of receiving a lump-sum distribution, he receives payments. This greatly reduces the tax impact on him, because he pays taxes only on the amount of the payment, not the total amount of the fund. In addition, the fund continues to grow, so that, when your son dies, the person he names as his beneficiary will begin to receive payments under the same tax-deferred conditions (i.e., the "stretch" factor).

Stretch IRA distributions are paid across multiple generations (from your wife, to your children and then to your grandchildren) without lump-sum distributions that incur heavy taxes and dilute the principal of your investment. Using this technique, your original retirement plan fund can provide income to your heirs for decades, with tax-deferred, continuous growth.

However, make sure your IRA provider confirms in writing that it will honor your Stretch IRA, and make sure to name your beneficiaries properly.

There are a few precautions to take when setting up a Stretch IRA in your estate plan. It is important to realize that the amount of money available to your heirs may vary from the projections you've seen, due to conditions that are beyond your control.

Although the projected amounts can be impressive, these amounts are based on assumptions about what may occur in the future that will affect those who are intended to benefit from the "stretch" possibilities.

You and/or your spouse will take only the minimum distributions required by law, and make no other withdrawals (Distributions must commence April 1 of the year after you reach age 70 1/2 );
Your beneficiaries will die earlier than their normal life expectancies project;
The tax laws will not change;
Inflation will not erode your investment;
The rate of return will remain the same.

Some of these assumptions may not be appropriate for your particular situation. Consequently, the use of certain assumptions in the projection may result in a projected amount higher than that which will actually result.

Since income taxes on retirement plan assets are deferred, not eliminated, ultimately someone will have to pay those deferred taxes -- as well as potential estate taxes when your estate is settled. Without careful planning, this may not only trigger a huge tax burden for your family, but also significantly reduce your control over disposition of your wealth, both for you and for your wife.

However, there is a way to direct how your wealth is allocated, to provide secure, continuous income for your wife and family, gain tax deductions for you, your wife and your heirs, and fulfill personal and philanthropic goals.

All these objectives can be achieved by donating part or all of your retirement fund assets to a charity, private foundation, or non-profit cause you care about.

In fact, charitable giving through your estate is one of the best ways to accomplish both your financial as well as your personal goals because it ensures that your money is directed as you choose, not how the government decides.

Charitable donations using retirement plan assets can be made in many different ways. For example, you or your wife can donate your entire account to charity outright at death. Your donation would escape both federal estate and income taxes, and your family would receive a large charitable deduction that can help offset any taxes incurred from other assets that are passed along to them.

Another option is for your wife to roll over the assets she receives from your retirement plan into another IRA and designate a charity as the beneficiary of any unused assets when she dies. The charity will not have to pay any taxes on the amount it receives, and your wife's estate will receive a charitable deduction.

Alternatively you can use retirement plan assets to fund a charitable gift annuity that provides lifetime income and a series of tax deductions.

You can also utilize your retirement plan assets to establish a wide variety of trusts to accomplish tax savings, provide income, and make a charitable contribution.

Two examples of trusts enacted for the benefit of the spouse and family have been described previously, and both make excellent vehicles for charitable giving: the Qualified Terminable Interest Property Trust ("QTIP" Trust) and Qualified Personal Residence Trust ("QPRT" Trust).

Marital Trust: Retirement assets could be distributed at your death to a Marital Trust to benefit your wife. When your wife dies, the unused assets may be distributed to a charity that either or both of you designate, providing your wife's estate a charitable deduction on the full amount the charity receives.

Charitable Remainder Trust (CRT): You or your wife could use the retirement plan funds to establish a Charitable Remainder Trust. The trust can be established to provide income to you, and later to your wife. Your wife can receive all of the net income from the trust during her lifetime, and at her death, the charity receives the unused balance of the assets. The income tax on the unused balance of your retirement account is not only deferred, it is eliminated.

The CRT can be designed to provide fixed payments or payments based on a percentage of the trust principal predetermined annually. As with other giving vehicles, the estate passed on to your wife's heirs would receive the benefit of her charitable donation.

Another version of the CRT is sometimes called the "Give It Twice Trust" because the income is generated over multiple generations; thus the amount paid to your beneficiaries may equal or exceed the amount used to establish the trust.

Generally you name your wife as the beneficiary, your children as the secondary beneficiaries, and a charity as the ultimate beneficiary. Your wife receives continuous income during her lifetime; then the trust generates income for your secondary beneficiaries throughout their lifetimes. When all the remaining secondary beneficiaries have died, the charity receives the unused portion of the trust.

Although very worthwhile, trusts can be somewhat complex and may not be right for everyone.

Establishing a trust will require assistance from an experienced financial advisor. If you are philanthropically inclined, discuss the full array of available options with your financial advisor or tax attorney.

The answer to this question depends in part on your thoughts and aspirations for yourself and your family, what your needs are now and what you project them to be. When you and your wife are thinking about what money and property you wish to leave to your spouse and heirs, also think about what you wish to accomplish with the balance of your wealth. Your estate plan may be the means to distribute your assets to the best tax advantage, and also an opportunity to reflect what you truly value.

Although many people buy life insurance to ensure financial security for their spouse and families, it can do more than provide income replacement -- it is a versatile tool that can accomplish several goals in your estate plan. For example, you may draw from your whole life policy's cash values to supplement your retirement income, or underwrite your grandchildren's college expenses by designating them as beneficiaries of your policy.

From your wife's perspective, the tax news is good: She will receive the proceeds from your insurance policy free of income and estate taxes.

The downside is not as immediately apparent: proceeds from your life insurance policy could subsequently push your wife's estate over the applicable individual exclusion amount and trigger taxes on her estate.

Changing the beneficiary designation from your wife to another beneficiary -- for example, your grandchildren -- may solve this problem, though taxes would still be due if your estate is too large.

When thinking through your estate plan, be sure to look at your life insurance policy. Make it work for you by structuring your policy to obtain maximum benefit for you, your wife, and your heirs, without becoming a tax liability. Here's a possible scenario:

Suppose your wife will need the income generated from the life insurance policy, but you are concerned that any unused balance may cause tax problems later for your heirs. One option is to establish a trust as the owner and beneficiary of the life insurance policy, with your wife and then your children as beneficiaries of the trust and your wife as trustee. This way, the insurance proceeds are not included in your estate for federal tax purposes, your wife retains control of the proceeds and receives the income she needs, and any assets remaining after your wife's death pass to your children free of estate tax.

If you feel your wife will have enough other assets to sustain her during her remaining years, and your concern is for possible tax liability to your heirs, you may wish to consider the benefits of donating a life insurance policy to charity. This technique can earn you a tax deduction in the year that the policy is donated, and help both your wife and heirs by removing the proceeds of the policy from your taxable estates.

You can do this in a number of different ways, and the tax benefits will vary according to the technique you use.

For example, with fully paid or partially paid policies you already own, you can transfer the ownership of the policy to the charity or assign all the rights in the policy to the charity. This strategy removes the insurance proceeds from your estate and produces a tax deduction against your estate that further reduces the taxable amount for your heirs.

Another alternative is to purchase a new policy designating a charity as the beneficiary. This will earn you an annual tax deduction for the premium that you pay. At your death, the life insurance proceeds are deducted from your taxable estate. This is a good way to earn tax benefits for you now and to protect your wife and heirs from estate taxes later.

"Wealth replacement" is another way to make a gift to charity using life insurance while also providing you and your heirs continuing income and tax deductions.

For example, you could establish a Gift Annuity or Charitable Remainder Trust using cash or appreciated assets. Use part or all of the income the Annuity or Trust generates to buy a life insurance policy to replace the asset you used to make the gift. The proceeds from the life insurance policy replace the value of the charitable gift and will pass to your heirs free of capital gains tax. You, your wife and/or your beneficiaries will receive an income stream, and your estate gains an immediate tax deduction for creating the annuity or trust.

Be sure to consult with an attorney, financial advisor or other estate planning professional when drafting your estate plan. You can search for highly qualified estate planning attorneys in your area at the American College of Trust and Estate Counsel's web site, www.actec.org.

Even if you already have an estate plan, you should periodically revisit and update your plan. A good estate plan is continuously evolving and dynamic. It should reflect changes in tax laws, your financial and familial situation, and especially your values.

Two highly respected estate planning attorneys retained by the National Academies -- Mark Weinberg (301/468-5500, paladin@wjlaw.com) and Christina Mesires Fournaris (215/963-5649, cfournaris@morganlewis.com) -- are available to answer your estate planning questions at no charge to you. While they cannot plan your estate, they can provide detailed information on the discussions you should have with your own advisors.

Additional estate planning information is available on the Insight on Estate Planning and Estate Planning News index pages. For technical information about specific giving vehicles and techniques, check out our Planned Giving Design Center. (When prompted for registration information, National Academies members can use username: amember and password: amember.)

To discuss your thoughts on making an estate-based philanthropic gift to the National Academies, contact Merrill Meadow (202/334-2431, mmeadow@nas.edu).