Common Financial Mistakes: Latter Stages of Life & Estate
Planning
For
many of us, the word “estate” now evokes images of Prince William and Kate
Middleton and seems worlds away from our lives. There are, however, practical
steps for all of us non-royals to follow in order to improve the latter stages
of our lives.
Durable
Powers-of-Attorney Reign.
Most people believe that
they will continue in good health and be of sound mind long after retirement.
Retirement—complete with advertisements including beaches and grandchildren—has
been pre-sold to the American public as a joyous time. Unfortunately, that is
not always the reality given unforeseen health-care problems.
In fact, there may be
situations where you—or a loved one—becomes critically ill during later years
and is not able to make important healthcare decisions. To prepare for these
situations, a trusted family member or close friend who is of a sound mind must
be appointed beforehand to have the legal authority to make the necessary
health-care decisions on your behalf. The proper legal authority is contained in
a legal document called a “Durable Power of Attorney,” and everyone approaching
their later years should consider having one drafted by an attorney.
The types of decisions
typically empowered by a Durable Power-of-Attorney include the power to:
• Affirm or refuse
consent to any type of medical care or procedure.
• Handle the financial
affairs of an incapacitated person.
• Terminate care and make
end-of-life determinations for terminally ill patients.
Remember that certain
states have specific requirements that may impact these decisions.
For example, in New York,
there is a Health Care Proxy law that requires a document separate from a
Durable Power of Attorney that appoints someone as your official health care
agent.
Another important
document for consideration is a Living Will, which is a statement of your
requests regarding your health care and medical wishes. It sets forth your
decisions about important issues such as continuing or discontinuing medical
care and prescriptions—including end-of -life decisions. However, a Living Will
cannot be enforced without a valid Durable Power-of-Attorney, if you are
incapacitated at the time of need.
Recipe for Issues: Not
Having a Will
When a person dies
intestate (without a will), state law controls that person’s estate and what
happens to the assets. Because laws vary from state to state, there is no
certainty of what will happen except that the state’s wishes will be
done—according to that state’s particular laws.
Without a will, your estate will go into probate, and the state will appoint a
trustee to administer the estate. It’s a slow process, and in most cases of
those married with children, states will award up to one-half of your estate to
your surviving spouse. The balance is usually split among the surviving children
in equal portions, regardless of age and status as half-siblings or full
siblings.
On the other hand, if you
have a valid will written now, your estate may be settled in a shorter period
and your expressed wishes followed. You may desire to leave all of your estate
to your surviving spouse, or leave different percentages to various relatives,
friends, and charities.
Tax Planning Helps You
Leave More To Your Loved Ones, Not the Government.
With proper tax planning,
your will can minimize the amount of taxes that your estate may pay, thus
maximizing what will pass to your heirs. Your estate consists of everything you
own or have interests in at the date of death (e.g. cash and securities, real
estate, insurance, trusts, annuities, business interests) at the current fair
market value.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010 includes several federal estate tax changes that provide a temporary window
of savings to individuals or spouses involved in estate planning.
Under the new law for 2011 and 2012, the maximum federal estate tax rate is 35%
with an exclusion amount of $5 million. In other words, if you are an individual
who passes away during 2011 or 2012, you don’t have to worry about
paying federal estate tax unless your estate is worth more than $5 million.
If one spouses dies within the two-year window after 2010 but before 2013, there
is also a unique “portability” option that increases the applicable estate and
gift exclusion amount for the surviving spouse by the amount of the unused
exclusion amount of the deceased spouse. It’s “portable” because it can move
from one spouse to the other, effectively increasing the exclusion from $5
million all of the way up to the limit of $10 million. Not an
insignificant amount!
In order to take advantage of the portable exemption, there are certain
requirements that must be met—such as both spouses being US citizens and/or
residents and filing an estate tax return at the time of the first spouse's
death
Lifetime Gifting Is
Also an Option.
The new tax law also
presented a unique and limited opportunity to remove appreciation from your
estate. For the first time in a
decade, the gift tax and estate tax are once again reunited and you are allowed
to make tax-free gifts up to $5 million during 2011 and 2012.
This is an opportune time to make large gifts to your heirs during your
lifetime.
Using Trusts May Be
Easier Than You Think.
Once the province of the rich, trusts have evolved in recent years into useful
vehicles to protect assets and pass them on to heirs. Trusts are legal
mechanisms that allow you to:
• Create conditions regarding how and when your assets will be distributed upon
your death.
• Reduce your estate and gift taxes.
• Distribute assets to your heirs without the cost, delay, and publicity of
probate court.
• Provide greater protection of your assets from creditors and lawsuits.
It’s All About
Receiving The Right Advice at the Right Time.
CRI’s team offers the
knowledge and perspective you need to maximize your later years—for your loved
ones and your heirs.
For
more details, be sure to visit our
blog article on estate planning.
Meanwhile, we are here to answer any estate questions that you may have, so feel
free to call us.