Protect My Estate

Estate planning is not just about tax planning. It comprises a variety of sensitive issues that need to be considered and included in a plan that will tell your survivors what steps to take when you are incapacitated or are no longer here.

A letter of instruction will let your family members know what initial steps they should take after you are gone. In the letter, be sure to indicate where you keep important documents, such as bank and investment statements, your will, and life insurance policies. Provide the names and addresses of people to contact, including your attorney, financial advisor, accountant, and the executor of your estate.

Be sure to draft a will. Most attorneys recommend that you review your will every two years. Be sure to review it soon after any major life event, such as a divorce, a marriage, a birth, an adoption, or after a major business event, such as a job change, the sale of a business, or the sale of property. Be sure to consult an attorney who specializes in wills and trusts, because a common mistake that married folks do is to leave everything to their spouse and call it a day. The problem is that leaving everything to your spouse may unnecessarily increase the taxes that your estate will incur when it eventually passes to your children or other heirs.

Prepare for incapacity and create a living will with a medical directive. As part of your estate plan, you will also want to take steps to protect your family if you become seriously ill or disabled. A living will that includes a medical directive enables you to designate a person to make health care decisions on your behalf if you become incapacitated. This may be especially important if you wish to have someone other than your closest relatives making decisions for you. In this document, you can specify the type of medical treatment you wish to receive and under what circumstances the treatment should or should not be administered in case you are suffering from an incapacitating condition. Your attorney can help you prepare these documents in compliance with any applicable federal or state law requirements.

Create a durable power of attorney. With this document, you can name someone to manage your financial and personal affairs if you no longer can. Among the powers you can grant are the authority to make gifts, conduct real estate transactions, assign ownership of a life insurance policy, or change a policy’s beneficiary. If you have a basic living trust, you may not need to use a durable power of attorney because your successor trustee can make decisions about the assets you own in your trust; however, using a durable power of attorney may be less costly than establishing a trust. A living trust or durable power of attorney can also help you maintain your privacy. If you do not have either tool in place and become disabled, it could be necessary to petition the court to appoint a guardian to oversee your affairs. Please note that such petitions are part of the public record.

Be careful about holding assets jointly with children. Designating anyone other than your spouse as joint owner of an account can create unexpected problems. If the other person’s ownership interest in the account exceeds $13,000, the 2011 tax-free gift limit, you could incur a gift tax. If the person gets into financial trouble, creditors or the courts could go after the money in your account. Other steps—such as establishing a living trust or using transfer on death registrations for investments—may facilitate a transfer of assets at your death without some of the potential problems joint ownership could create.

If necessary, take the time to retitle your assets. If you establish a living trust, be sure to take the time to transfer your assets into the trust. Assets that are not transferred to the trust may have to go through probate, which costs time and money.

If you are unmarried, remember that property shared by unmarried couples generally is governed by contract—not family—law. Whoever is listed on the title of an asset is considered the owner unless there is an agreement to the contrary. In most states, if you die, your partner—unlike a spouse—would not inherit property by law. You may want to consider retitling certain assets.

Have a will and consider using trusts to protect your partner. If you die “intestate”—that is, without a will—your partner generally will not have any legal rights to assets held in your name unless he or she is designated as a beneficiary of the asset (such as a bank account or insurance policy) because most states’ intestacy rules do not recognize an unmarried partner as a legal relative for inheritance purposes. For that reason, you may need a will to make sure all your assets pass according to your wishes.

Review your life insurance policies and consult with an attorney to create an irrevocable life insurance trust (ILIT). An ILIT is a type of trust specifically created to own and maintain life insurance on the life of an individual(s). When the insured individual passes away, the policy’s death benefit is paid to the trust to be managed for the benefit of the trust beneficiaries. Because the trust is irrevocable, the policy proceeds that are payable upon the insured’s death are not included in his or her taxable estate. Instead, the income and estate tax-free proceeds are collected by the trustee and held by the ILIT. The funds are then distributed to the ILIT beneficiaries, per the provisions of the trust, to help pay any taxes, expenses, and debts owed by the decedent and the estate.

To summarize, as part of an estate plan, an ILIT can offer several benefits:

  • Removes otherwise taxable property from the taxable estate of the grantor
  • Provides a source of liquidity for the estate to pay debts, taxes, and expenses
  • Maximizes the amount to pass to heirs through an income and estate tax-free death benefit
  • May provide the grantor with control from the grave
  • May protect the death benefit from possible creditor attack

Consider long-term care insurance. If you are not wealthy enough to cover the costs of a prolonged nursing home stay, and if you will not qualify for the nursing home coverage provided by the state Medicaid programs, then you will need to consider buying long-term care insurance.

Although we know the top estate and gift tax rate is 35 percent and the exemption amount is $5 million for 2011, no one can say for certain what tax rates will be in future years. Therefore, it is critical that you work closely with your advisors to ensure that you are aware of the latest tax law changes and make tax-smart decisions for your estate.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situations.

Cup of coffee and book in the summer sunlight