Many people believe they don't need estate planning because they think they don't have an estate. Or they think the value of their estate is not great enough to cause estate taxation, so what's the point?

With few exceptions, everyone has an estate -- even the young child with a custodial account in his name and the granddaughter who received a lovely piece of jewelry for her 16th birthday.

Bottom line: If you own something of value that you would pass on to someone else upon your death, you have an estate. Whether you know it or not, you also have an estate plan. The state has one for you free of charge (well, sort of) if you don't get around to writing a will or designing a plan of your own.

Broadly speaking, an estate plan encompasses the accumulation, conservation and distribution of an estate. A good plan will enhance and maintain the financial security of individuals and their families.
Estate planning
You need certain documents to meet your estate-planning goals and a basic understanding of the way it all works.
Estate planning basics:

   Wills: the cornerstone of all estate plans.
   Trusts as a complement to wills.
   The estate tax system: how it works.
   Current law.
   Gift tax on generosity.
   State death tax may apply.

Wills: The cornerstone of all estate plans

A will is a personal declaration of your intentions about the disposition of your property at death. Everybody should have one.

Because a will does not become legally enforceable until your death, it may be changed at any time before the maker's, or testator's, death or mental incompetence. A properly drafted will contains instructions for your personal representative, the executor. The executor is responsible for administering your estate.

A will offers many advantages, enabling you to control, to a large extent, what happens after you're gone.

With a will, you can:

   Choose the executor.
   Designate a guardian for minor children or others unable to fully care for themselves.
   Distribute your property to beneficiaries you choose.
   Be generous to charity at death.
   Minimize estate tax.
   Get a sense of accomplishment and peace of mind.

A person who dies without a will dies "intestate." Dying intestate can be unnecessarily costly for your heirs and leaves you with no specific say about who receives your assets or in what proportion those assets will be distributed.

Some assets, such as individual retirement accounts and life insurance proceeds, bypass a will entirely and go directly to the beneficiaries listed and filed with the financial firm that handles those products. Otherwise, the state decides who gets what. Each state has a prescribed order for the distribution of property of those who die with no will.

Having your property items pass according to your state’s succession statutes is a rather rigid default distribution scheme because predetermined, specific percentages of your estate assets will go to your closest blood relatives -- the state's way, not yours.

Whether you have a will, your property that does not pass according to its title or beneficiary designation goes through probate -- that is, the state court's system for monitoring its distribution.

Characteristics of a will

   A simple will is a relatively inexpensive document, often costing a couple of hundred dollars. This guesstimate varies according to complexity, size of the estate and geographic location.
   A will only transfers property that you own in your name alone. Therefore, property you own as a joint tenant with right of survivorship or property that passes by beneficiary designation, such as life insurance proceeds or retirement assets, cannot be transferred by will.
   Even if you have a trust, you should still have a will for any assets the trust does not cover.

Trusts as a complement to wills

You establish trusts during your lifetime. Trusts involve the transfer of your property to an individual or corporate trustee who manages the assets within the trust's control for the benefit of one or more others -- the beneficiaries.

A living, or inter vivos, trust is one that is effective during your lifetime; a testamentary trust is one that is contained within the provisions in your will. A testamentary trust does not become operative until your death.

Because the will can be changed prior to death, assuming the testator, or creator of the will, is mentally competent, the trust terms are amendable. Living trusts can be created to be revocable or irrevocable. With a revocable trust, the creator of the trust, or grantor, has access to the trust corpus -- another word for "principal" -- while alive; the trust assets within an irrevocable trust, however, no longer belong to the grantor. Once transferred to the trust, they are owned by the trust entity.

The reasons for trusts are as varied as their creators. These are some motives behind their creation.

Purposes of trusts

   Obtain professional management and investment of trust property.
   Minimize gift and estate taxes.
   Distribute assets to beneficiaries efficiently and without the delay, expense and, especially, publicity of probate.
   Place conditions on how and when your assets should be distributed. You may not want your son to squander his inheritance on a Porsche!

The estate tax system: How it works

Estate and gift taxes are part of a transfer tax system that is separate from the income tax system we all know and love so well each April. Gift taxes apply to certain transfers of assets or interests in property that a person, the donor, makes to another, the donee, while still alive. Estate taxes come into play after a person's death.

In 2013, a deceased's estate is not subject to estate tax at the federal level until its value is in excess of $5.25 million, as indexed for inflation. This means the great majority of U.S. taxpayers do not have to worry about the federal estate tax diminishing what they plan to leave to their loved ones.

Before you summarily dismiss the federal estate tax, however, be aware there are some types of property you may not consider to be part of your estate but the government does. A prime example is life insurance that you or your employer own on your life. Yes, that seems unfair because you will not live to receive the insurance proceeds ... but the Internal Revenue Service's emphasis is on the "value passing to others as a result of your death" concept.

Other sometimes-overlooked assets that can significantly increase an estate are pension and retirement plan funds and the value of sizable gifts you made over time.

Current law

The value of property the government allows to pass free of estate tax is currently called the basic exclusion amount. The Economic Growth and Tax Relief Reconciliation Act of 2001, fondly called EGTRRA, provided for the basic exclusion amount, then called the applicable exclusion amount, to increase after 2001. Under the most recent tax act relevant to transfer taxation -- the American Taxpayer Relief Act of 2012, or ATRA 2012 -- the basic exclusion amount for gifts, estates and generation-skipping transfers, or GSTs, is $5.25 million in 2013, and the highest tax rate for amounts more than $5.25 million is 40%.

One recent and interesting provision made permanent by ATRA 2012 is called the deceased spouse’s unused exclusion amount, or DSUEA, or sometimes DSUE. This provision allows a surviving spouse to use what remains of his or her deceased spouse’s unused exclusion amount in addition to the surviving spouse’s own amount. For example, in 2013, if the first spouse to die only used $3 million of his or her basic exclusion amount of $5.25 million, the surviving spouse could carry over the deceased spouse’s remaining $2.25 million and have a total available exclusion amount of $7.5 million ($2.25 million plus $5.25 million).
Gift tax on generosity

Gifts are gratuitous transfers you make during your lifetime.

The annual gift tax exclusion is a silver lining that the gift tax rules allow. In 2013 you can annually make as many gifts of $14,000 to as many recipients as you can afford without those gifts even being a blip on the gift tax screen. These lifetime gratuitous transfers are completely gift tax-free. The amount is periodically adjusted for inflation.

In addition, if in 2013 you "gift-split" with your spouse, $28,000 can pass to each child, grandchild or any other person you choose. The recipients don't have to be related to you. Some people have referred to an annual exclusion gifting program as "the poor man's estate plan" because it effectively reduces the value of your estate without any interference from Uncle Sam.
State death tax may apply

Not surprisingly, many states want a piece of the estate revenue action, too. So, though you may not be concerned about federal estate tax, your estate may have to chip in to state coffers. Some states allow exemptions for closely related beneficiaries; others tax dollar No. 1.

Some states do not have a death tax, and most, if not all, do not tax the value of assets left to a surviving spouse.

Estate planning is your personal opportunity to make decisions concerning your assets, finances and health care. Although some individuals narrowly view estate planning as a way to assign their assets to heirs, others see it as a way to perpetuate their legacies.

With an estate plan in place, you can sing (like Frank Sinatra), "I Did It My Way."