As you approach retirement, doing some estate planning—or revisiting the estate documents you already have in place—may not be at the top of your retirement to-do list. They should be, though.
That’s because estate planning doesn’t just ease your mind about what happens to bank and retirement accounts, real estate, and other assets after death. Proper estate planning also has a lot to do with how your life can go after you retire.
An estate plan can protect you if you become incapacitated and unable to make medical and financial decisions for yourself. A properly funded and managed trust can help ensure money you saved won’t be frittered away by loved ones or seized by their creditors.
Yet a 2019 survey from Caring.com found that 47% of respondents ages 55 to 64 don’t have estate planning documents, such as a will or living trust. Of those 65 and older, 32% don’t have one or both of these documents in place.
More than half of those surveyed said the main reason they put off estate planning was that they “just haven’t gotten around to it.” Others assumed they didn’t have enough assets to leave or were worried that it takes too long to set up an estate plan.
Fortunately, estate planning doesn’t have to be confusing. This estate planning guide provides crucial information you need to prepare or revisit your estate plan, including:
- The four documents every estate plan should include
- How to set up a trust that can protect your assets
- How to minimize risk to assets you wish to pass on to others
- How estate or inheritance taxes could affect your heirs
- Strategies for long-term care planning and asset protection
- What snowbirds need to know about property owned in another state
- How to choose an estate planning attorney
What an “Estate” Is and Why You Need a Plan
According to the Internal Revenue Service (IRS), your gross estate for tax purposes consists of “an accounting of everything you own or have certain interests in at the date of death.” Your estate may include real estate, cash and securities, life insurance, annuities, and business interests, along with other assets such as personal collections.
Estate planning allows you to design a strategy unique to your individual, family, and/or business situation, including tax and liquidity planning.
“You really do not create an estate plan for yourself, just like you do not take out a life insurance policy for yourself,” says Kyle Krull, an estate planning attorney in Overland Park, Kansas. “In both instances, you’re doing it to protect everyone you love and everything you have from chaos, inconvenience, and potential family feuds.”
What Can Happen to Your Estate and Assets Without Proper Estate Planning
If you die “intestate”—that is, without a will—the laws in your state will determine who inherits from you. If your assets exceed your state’s applicable “small estate” limit, you can expect your estate to pass through state probate court, the formal legal process that appoints an administrator to administer the estate and distribute assets to court-selected beneficiaries.
The court basically follows your state’s laws of descent and distribution with no consideration for your family dynamics or any wishes you may have expressed to others. Your estate also may be subject to estate taxes that might otherwise have been avoided with proper estate planning.
“Some people think that having a will is sufficient to avoid probate. It’s not,” says Maureen Lyons, an estate planning and elder law attorney in Riverside, California. “A will just allows the testator (decedent) to ‘override’ the state defaults by naming an executor and beneficiaries. If you don’t have a will, then the state probate code fills in the blanks regarding who gets what.”
What an Estate Plan Includes
A basic estate plan comprises at least these four documents:
1. Last Will and Testament
A will provides for the distribution of certain property owned by you and allows you to choose how to distribute or dispose of property in just about any manner you choose. Some exceptions to free choice may apply, though, such as state laws that could prohibit disinheriting a spouse or children. A will doesn’t govern disposition of titled or jointly titled property with rights of survivorship or assets with designated beneficiaries, such as payable on death accounts, life insurance, retirement plans and accounts, and employee death benefits, which pass outside your probate estate.
2. Power of Attorney for Finances
If you become incapacitated, a durable power of attorney allows the person you name as your “agent” or “attorney-in-fact” to make financial and certain legal decisions on your behalf, including things like accessing, opening or closing bank accounts, filing your tax returns, effecting the sale of securities, and selling real estate.
When naming your durable power of attorney for finances, “integrity, not financial acumen, is often the most important trait of a potential agent,” according to the American Bar Association.
3. Durable Power of Attorney for Healthcare
Also called a healthcare power of attorney, medical power of attorney, or healthcare proxy, the durable power of attorney for healthcare allows you to name a person who can make medical decisions for you based on your instructions if you become incapacitated and unable to make those decisions yourself.
The agent and successor agent you choose as healthcare power of attorney should be able to make life-and-death decisions according to your wishes, not their own.
4. Advance Health Directive
An advance health directive expresses your specific wishes for medical treatment if you are incapacitated. Having such a directive in place helps ensure that your wishes are followed and also can reduce the strain on family members who otherwise would be making critical decisions without your input. The durable power of attorney for healthcare is a form of advance directive. So is a living will, which comes into play when you have a terminal illness or are in a state of permanent unconsciousness.
In addition to these four documents, an estate plan also may include:
- One or more trusts designed to avoid probate and distribute and/or protect assets
- An asset protection strategy for long-term care planning
- A business succession plan or other business-related documents
- Final wishes for funeral arrangements, pet care, and other personal matters
How Often Should I Revisit My Estate Plan?
Life can change a lot in just a few years. Maybe you’ve remarried, moved, or bought property in another state. Perhaps you have new grandchildren. It’s a good idea to review your estate plan with your estate planning attorney every two to four years, or more often if you’ve experienced significant change.
Estate Planning: One Size Doesn’t Fit All
Think of a friend with a life and family much like your own. Maybe you’re both married, around the same age, earning similar incomes, and have grown children as you approach retirement. However, your estate planning needs could be very different.
Maybe one of you wants to set up a trust for a child with special needs. The other may have a grown child who would blow through an inheritance without restricted distributions and a trustee’s oversight. Maybe you remarried and want to ensure that your kids from the first marriage won’t be disinherited if you die first and your husband or wife remarries.
Your estate plan should—and can—be designed to address your unique needs and situations.
Hiring an Estate Planning Attorney vs. Using DIY Documents
It may be tempting to purchase fill-in-the-blank wills, powers of attorney, and other documents online. After all, these forms are a lot less expensive than paying an estate planning attorney.
However, unlike an attorney experienced in estate planning for blended families, estranged children, long-term care needs, and many other situations, DIY forms may not dig deep enough to avoid potential problems that can arise.
If you’re single with no kids and don’t own more than a house, car, and bank and retirement accounts, you may be able to cover estate planning basics by setting up survivorship titling and beneficiaries on bank and retirement accounts. You may even be able to use state bar association-approved forms for durable healthcare and financial powers of attorney, along with an advance directive.
However, in all cases, you should still ask an estate planning attorney to review your estate plan to make sure it’s set up properly and according to state law.
Why and How You May Benefit From a Trust
A trust is a legal arrangement that allows assets of your choice to be held in a way that can preserve, protect, and distribute your assets, including:
- Protecting life insurance proceeds and other assets from a beneficiary’s creditors
- Managing your assets if you become ill, disabled, or need long-term care
- Ensuring that a child with special needs has a lifetime “safety net” that doesn’t prevent them from receiving public assistance and other government benefits
- Making sure that, if your spouse remarries after you die, your children or grandchildren won’t be disinherited
- Regulating and overseeing distributions to financially irresponsible heirs
- Transferring property owned in another state into the trust to avoid that state’s probate court process
Every trust has three parties:
- Grantor or settler, the creator of the trust
- Trustee, the manager or administrator of the trust
- Beneficiary or beneficiaries, who will benefit from the trust
And there are two fundamental types of trusts:
A revocable trust is set up during your lifetime, and you, the grantor, reserve the right to terminate, revoke, modify, or amend the trust.
An irrevocable trust can’t be terminated, revoked, modified, or amended by the grantor, with limited exceptions.
Most often, an irrevocable trust is set up for tax or asset protection.
There are three different ways to set up “when” a trust becomes effective:
- A revocable living trust is set up and funded while you’re still alive. You are the beneficiary until your death and, following your death without probate, the trust becomes irrevocable to distribute its assets according to your wishes.
- An irrevocable living trust is set up and funded while you are alive, but in most instances you are neither the trustee nor the beneficiary. This type of “living trust” is often done for tax minimization and asset protection purposes.
- A testamentary or death trust is an irrevocable trust created by your will, and the trust provisions are contained in the will. This type of trust is set upfollowing your death after probate to distribute its assets according to your wishes.
Regardless of the type of trust or when it is created, every trust must be properly “funded” with the intended assets to accomplish its purpose. An estate planning attorney can help make sure your asset titles and beneficiary designations align with your estate plan to properly fund your trust.
How Estate Planning Affects the Taxes of the Estate and Heirs
If a U.S. citizen dies in 2019, a federal estate tax return must be filed if the decedent’s gross estate is more than $11,400,000. A federal estate tax return also must be filed if the estate transfers any deceased spousal unused exclusion to the surviving spouse, “regardless of the size of the gross estate or amount of adjusted taxable gifts,” according to the IRS.
While most people’s gross estate won’t exceed that federal threshold, several states impose their own estate and/or inheritance taxes, whose threshold amounts may differ.
“The state estate tax is paid by the estate itself before distribution, and the inheritance tax is paid by the person inheriting from the estate and varies based on familial relationship,” says Krull. “An experienced estate planning attorney can help you create a plan to minimize or even eliminate federal, state, and inheritance taxes.”
How an Estate Plan Can Protect Your Assets for Long-Term Care
“The biggest threat to most people’s wealth and legacy isn’t usually estate taxes. It’s probably the cost of long-term care,” says Lyons. This is all the more reason to implement a long-term care strategy as part of your estate plan, especially if you don’t have long-term care insurance.
Someone turning 65 has nearly a 70% chance of needing some form of long-term care services, according to the U.S. Department of Health and Human Services. The national median cost for a home health aide is more than $50,000 a year, and the national median for a semi-private room at a nursing home is more than $89,000 annually, according to the Genworth Cost of Care 2018.
Elder law attorneys are typically more highly trained in addressing the long-term care component of estate planning. Strategies can include moving assets into an irrevocable trust or other methods to protect funds from nursing home and other long-term care costs.
“The purpose of transferring assets into an irrevocable trust isn’t to give anyone an early inheritance,” says Lyons. “It is a means of removing the assets from your own estate so that if you apply for Medicaid (or Medi-Cal in California), you would not report them since you no longer own them. Your trustee can then use those assets to pay for those things not covered by Medi-Cal or Medicaid.”
What Snowbirds Should Know About Estate Planning
Each state has its own probate laws that apply to owned real estate. If you own real estate in another state or spend a lot of time living in a different state, proper estate planning can make life a lot easier on grieving family members when you die.
For example, let’s say that you and your spouse buy a second home, a condo in Florida, in which to spend the winter months. You take title to the home as joint tenants with rights of survivorship. When the last spouse dies, the real estate in Florida would have to go through Florida probate, just like any real estate similarly owned in your home state would have to go through probate there.
One common solution? “Create a revocable living trust and title all of your real estate in it to avoid probate in both states,” says Krull.
It’s also a good idea to consult with an estate planning attorney in any state where you reside during even part of the year and get durable powers of attorney for finances and healthcare and an advance directive drawn up according to that state’s laws.
“While the laws of most states provide that legal documents properly prepared in one state will be honored in another state, it is ‘cheap insurance’ to cover your bases wherever you spend time,” says Krull.
How to Choose an Estate Planning Attorney
When it comes to identifying the right estate planning attorney for you, you have options:
- If you ask trusted friends and family members for referrals, be sure to verify the experience, credentials, and reputation of any recommended attorney.
- Search your state bar association, or the state agency or judicial branch that is charged with attorney licensing and disciplinary actions.
- You also can search directories such as Avvo and Lawyers.com, which include independent ratings and client reviews.
What are my next steps?
Set up an estate plan if you don’t have one, or revisit the estate plan you have in place to make any necessary changes.
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