There is only one absolute truism when it comes to money: You can’t take it with you.
Of course–and I’m not the first to point this out–that’s not exactly where your money would do the most good anyway.
That being the case, it’s not worth it to die trying to hold on to your money, but rather to live your life planning for the future of your assets and loved ones.
Estate planning is one of the most overlooked areas of financial management, constantly put off by the average person because the topic–your own mortality–falls somewhere between unpleasant and morbid. Face it, you have three choices: leave your money to family and friends; give it to a charity or foundation you believe in; or pass it to 250 million strangers represented by Uncle Sam.
In reality, however, estate planning is not so much about money or death, but people–and how those people will act or be treated–when your time is up.
Whether you have assets or not, taking care of the future is essential. Consider it a mistake if you:
– Procrastinate instead of getting your affairs in order. In the axiom about death and taxes being life’s only certainties, only taxes need to be addressed on a regular basis.
Experts say many people equate writing a will with “I’m going to die,” as if a mortal event will occur within minutes of completing the paperwork. Because there is no deadline (pardon the phrase) to estate paperwork, people let it slide.
Worse yet, procrastination leads to haste. The best time for comprehensive estate planning or for updating papers is not right before a big trip, when parents suddenly feel a need to appoint guardians, or in the days before some medical procedure. To avoid emotion and have a clear head, make plans, whenever possible, when your demise still seems a long way off.
“Some of the most important estate planning issues are not financial at all, they are personal: choosing guardians for your children, picking people to make health-care decisions if you become incapacitated and choosing all of the people who will be involved in the process if something happens,” said Bill Morrissey of Sound Financial Planning, an advisory firm in Mt. Vernon, Wash. “Put estate planning off and you could have some people who you don’t want or like (like the government) in the middle of your affairs.”
– Don’t have a will, living will or health-care proxy. Dying without a will results in “intestacy,” which is a painful-sounding way of saying that the state will force its own will upon the heirs it chooses.
If you don’t believe you need a will–and the only people who should even let themselves think this way have no children, limited assets and no spouse–check your assets carefully. Don’t forget pension or profit-sharing benefits and life insurance, even if you don’t pay premiums or contribute yourself. If something happens, that money is in your estate.
“Most people underestimate their assets by looking at what they have today, not at what their estate would be if they died,” said Jonathan L. Koslow, estate planning expert in the New York law office of Skadden, Arps, Slate, Meagher & Flom. “If you have a house and a 401(k) and a profit-sharing plan if employers take out life insurance on one or both spouses, then you may have a lot more estate than you realize.”
Living wills and medical directives–sometimes called a health-care proxy–provide specific instructions as to who will make medical decisions and what choices they should make in the event you become incapacitated.
(For a living will and health-care proxy without an attorney, call Choice in Dying at 1-800-989-WILL. The group will send a free, state-authorized advance directive, with instructions, that can be completed in the presence of two witnesses.)
– Have a “sweetheart” or “I love you” will leaving everything to a spouse. It’s romantic and cuddly, but it’s not smart to leave everything to your spouse if you have amassed a high net worth.
Your spouse gets the estate without tax penalty. But your spouse’s death piles everything into one estate, creating “second death wallop,” where between 35 and 60 percent of the assets over $600,000 will be taken by the government.
It is possible to create a trust–called a credit equivalent bypass trust–that shelters up to $600,000 upon the death of the first spouse. The income from this money can support the surviving spouse; when he or she dies, this money is not included in the estate, allowing for the shelter of another $600,000 from the tax man.
“If you work hard to earn it, it’s simple mathematics to see why you should protect it,” said Steven P. Kanaly of Kanaly Trust Co. in Houston. “You earn a dollar, pay 40 percent in income tax and then die and might have to pay 55 cents on the dollar in estate tax. You work too hard to give up that much.”
– Haven’t retitled your assets to match your estate plan. One problem with estate planning is that the best way to title assets, jointly or in individual names, changes over time. For a couple with limited assets, for example, joint ownership makes sense because, if one partner dies, property passes automatically to the survivor. It’s considered a poor man’s will, though it’s no substitute for the real paperwork.
But when assets, including life insurance, exceed $600,000, heirs could wind up paying estate taxes. Retitling assets in individual names or in trusts allows a couple to pass up to $1.2 million tax-free to their heirs.
Typically, sheltering these assets involves establishing one of several different flavors of trust. But setting up the trusts does not actually retitle the assets. If investments are not retitled–and changing the controlling names on the paperwork is annoying but not difficult–the items will not wind up in the trusts and the estate plan, essentially, is gutted.
– Fail to update your papers. Death is forever; estate planning isn’t. It needs to be updated every two to five years. Review your will when anyone named in the will marries or separates; whenever a child is born, adopted or dies; whenever you move to a new state; if the needs of your beneficiairies suddenly change; if your income or wealth grows substantially; and with every major tax law change. If there is a specific reason to change guardians or executors, make the switch immediately or your most precious assets could wind up in the wrong hands.
