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Inherit Money?
Advice:
Your first move should be to deposit your new wealth in a bank or brokerage account, advises Martin Shenkman, a tax and estate lawyer in Teaneck, N.J.
With the money tucked safely away, there's no need to make hasty decisions about what to do with it.
Your mortgage may be the one debt you want to keep, if you've locked into a relatively low interest rate and aren't planning to retire right away. Paying off a 5.5% mortgage, for example, is the equivalent of earning 5.5% on your money. On average, you should be able to earn 7% or 8% annually on a good mix of stocks and bonds, a more profitable use of your funds. Paying off your loan also means losing the tax deduction for mortgage interest.
Taxes
Some inheritances, such as life insurance proceeds, are tax free. But, depending on its size, an estate may be subject to federal or state estate taxes. In 2007, estates worth up to $2 million are exempt from federal estate taxes. But more than a dozen states levy their own estate tax, often on smaller estates, and a few states require heirs to pay an inheritance tax.
Record the value of everything you inherit as of the date of your benefactor's death. That date usually determines your new cost basis for tax purposes; you'll be taxed on any appreciation from then until the date you sell the asset.
Inheriting a retirement account, such as a 401(k) or a traditional individual retirement account, is tricky business that requires professional advice. The rules vary depending on whether you're a spouse, a named beneficiary of the account or an heir named in the will.
You can usually inherit a Roth IRA without tax consequences, but that's not true of a regular IRA. If you simply withdraw the money from an IRA or 401(k), you'll owe taxes on the entire amount. Only if the benefactor is a spouse can you roll over an inherited IRA into your own IRA.
The best strategy would be to retitle the inherited IRA as a "beneficiary IRA" in your name and that of the deceased. That way, the money will continue to accrue tax-deferred earnings. In the year after the original owner's death, you will be required to begin taking annual withdrawals based on your life expectancy. Rules approved by Congress in 2006 allow you to convert an inherited 401(k) to a beneficiary IRA and handle it the same way. Previously, only spouses could transfer a 401(k) to their own IRA.
Investing
Don't let sentiment influence the way you handle an inheritance. A portfolio of bonds makes no sense if you're depending on asset growth to finance three decades of retirement, for example. Or perhaps your benefactor hung on to a large stock position to avoid a big tax bill. With the tax slate wiped clean, this could be the time to sell and start fresh.
If you plan to work for another decade or longer, you can afford to take more risk, putting 80% or more of your inheritance into a diversified mix of stocks or stock funds. But if you plan to retire in less than 10 years, keep one-third of the money in bonds. And if you're ready to retire and need to tap your investments for living expenses, up your bond allocation to 40%, with the remainder in stocks.
If your time horizon is shorter -- say, if you're funding college for your teenage children -- you should be more conservative, stashing at least half of your money in high-quality short- or intermediate-term bonds or bond funds. Through a state plan, the Grabskis prepaid tuition for all of their children at any public college in Virginia.
This article was reported and written by Steven Goldberg for Kiplinger's Personal Finance Magazine
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
Stretch Your IRA to Last for Generations
Tax-deferred assets can grow for decades if your heirs don't make mistakes.June 2006
You've built up a nice pile of cash in an IRA, but you don't need the money for your retirement. You want to pass on the account to your kids. If all goes as planned, the assets in this tax-deferred account will continue to grow, perhaps well into their retirement. Even your grandchildren could benefit.
But if you want to stretch your IRA tax shelter to last an extra generation or two, your heirs need to follow some very complex rules. Any slip-up could result in accelerating the cash-out and the tax bill that goes along with it.
To show the potential of the stretch strategy, MFS Investment Management offers this illustration: Dad has $100,000 in a traditional IRA, and dies at age 68. His 58-year-old wife, who doesn't need the money, rolls over the cash into her own IRA. But she doesn't touch it until she's 70 1/2, when the IRS requires her to take annual minimum distributions. (At that age, her distributions can be spread over 27 years.) She dies at 80, having netted, after taxes, $92,820. Her daughter, Anne, who is 50, takes distributions based on her own life expectancy; by the time she dies at 77, she's received net income of $371,971. Anne's son, the grandson of the original owner, pulls out $315,467 over nine years. Total after-tax payout: $780,259 over 46 years.Of course, this scenario is based on a number of assumptions, such as a 6% annual return on the account, 2005 tax rates and heirs who withdraw only the required minimum. "Part of this is having the confidence that your kids won't take out more," says Richard Johnson, an estate-planning lawyer with Waller Lansden Dortch & Davis in Nashville.So it's a good idea to sit down with your heirs and explain the benefits of the stretch -- and the inadvertent ways they could bungle the whole thing. Here's how to make your IRA last for generations.
Roll over your company plan.
If maintaining the tax shelter as long as possible is important to you, roll over any money left in a 401(k) or other company plan into an IRA. (The exception could be if you have a large amount of appreciated company stock. See "Your Questions Answered," April.) Most 401(k) plans force heirs to quickly cash out. Designate your beneficiaries. Whether it's a new IRA or an old one, make sure you name a primary beneficiary, usually your spouse. Also designate contingent beneficiaries, perhaps your children, in case your primary beneficiary dies before you. Or you can name your grandchildren. "They have the longest life expectancy, and the money compounds longer," says Philip Kavesh, an estate-planning lawyer with Kavesh, Minor and Otis in Torrance, Cal. "A 10-year-old's minimum distribution is very small and can go into a custodial account."If you do not designate beneficiaries, your IRA could end up in your estate. That would deny your heirs the chance to tie payouts to their own life expectancies. How fast they must withdraw depends on when you die, says Ed Slott, an IRA expert (www.irahelp.com). If there's no designated beneficiary and you die after 70 1/2, the minimum withdrawal would be based on what would have been your remaining life expectancy. If you die before 70 1/2, your heirs must cash out the entire account by the end of the fifth year following the year of your death.
Educate your spouse.
If a widow younger than 59 1/2 needs the money, she should keep it in her husband's IRA; if she rolled over the money into her own IRA, she would pay a 10% penalty on the early distributions taken before age 59 1/2. But if she continues to keep the money in her husband's account and then dies, the contingent beneficiaries would have to take distributions based on her life expectancy.If she wants her children to be able to take withdrawals over their lifetimes, she has two choices. She can "disclaim" the money, meaning it goes directly to the contingent beneficiaries. Or she can roll over the account into her own IRA. She would then designate beneficiaries, who could take distributions based on their longer life expectancies when she dies.Alert the next generation of the pitfalls. Make sure your spouse and other beneficiaries don't allow an adviser to liquidate the account and cut a check. Your beneficiaries will pay taxes on the distribution and lose the chance for tax-deferred growth.Also, note that only a surviving spouse has the right to roll over an inherited IRA into his or her own account. If your children or any other beneficiary cashes out an account in hopes of doing so, the full amount is taxable. If you have multiple beneficiaries, they may want to split your IRA into several "beneficiary IRAs" after you die. That way, says Vicky Schroebel, an MFS Investment vice-president, "each one can do the stretch the way they want. One may want to take the money and run, while another could allow the balance to grow tax-deferred."But Slott warns that the splitting must be done correctly or the money becomes taxable. "The average bank messes this up," he says. The split must take place by the end of the year after the owner's death. Each new account must be titled "beneficiary account" or "inherited account," and the deceased owner's name must remain on each account. Then the custodian of the IRA must conduct a direct trustee-to-trustee transfer to each beneficiary account.If stretching your IRA tax shelter to the nth degree is your ultimate goal, consider converting your IRA to a Roth. A demand that payouts start at age 70 1/2 doesn't apply to a Roth, so you could let your account grow until death. At that point, your beneficiaries could stretch payouts over their life expectancies and never owe tax on withdrawals.
.............................................................................................
Keep Your Wealth in the Family
It's important to get your paperwork in order, and let your kids into the loop.
By Ronaleen Roha
September 2006
Editor's note: This article appears in Kiplinger's special issue Success With Your Money.
Deciding how to leave assets to your heirs can be difficult even for the most agreeable of spouses, as Bud and Jacqui Reinfeld can testify. The Reinfelds have several nieces and nephews they would like to provide for, and when they got down to planning their estates after 35 years of marriage, they figured it would be easy.
And it was, for the most part. Both wanted to make the division as equitable as possible. But when it turned out that Jacqui had already promised their house to one of their nieces, that presented a problem.
To work things out, the Reinfelds, who live in Los Angeles, sought help from Michael Eisenberg, a certified public accountant and financial planner. He helped them draw up a formula that takes into account a possible increase or decrease in the value of the house. “People are amazed at what they don’t know about estate planning,” says Eisenberg. “Once they learn about what they can do, they loosen up a bit.”
Says Bud Reinfeld, “You have to be able to talk to someone who can help you work through the issues.”
Pieces of the plan
As the Reinfelds discovered, an estate plan should be customized to fit your specific goals and circumstances. But every well-crafted plan should include the following pieces:
A will.
Nearly 60% of Americans don’t have a will, according to a survey by Lawyers.com, an online database of lawyers from legal publishers LexisNexis Martindale-Hubbell. A will lets you distribute your assets as you choose. The person you name to be your executor or personal representative will gather your assets after your death, handle any probate proceedings and ultimately distribute your assets to your heirs or trustees.
A durable power of attorney for financial matters.
Only 26% of those surveyed by Lawyers.com have this valuable document, which names someone to handle your financial affairs if you are unable to do so. A durable power of attorney can go into effect as soon as it is signed. But most states permit a “springing” power that takes effect only if you become incapacitated.
A living will and a durable power of attorney for health care.
A health-care power of attorney names someone to make health-care decisions on your behalf if you can’t. It applies even if you’re temporarily incapacitated, by an auto accident, for example. A living will spells out your wishes regarding life-sustaining treatment. It generally takes effect only if you become terminally ill and can’t speak for yourself, or if you are in a persistent vegetative state.
Despite the publicity generated by the case of Terri Schiavo, the Florida woman whose husband and family battled over her treatment after she had been in a persistent vegetative state for 13 years, fewer than 30% of Americans have drafted these documents.
A review of beneficiary designations.
Beneficiary designations on assets such as life-insurance policies and IRAs can foil a great estate plan if they contradict other provisions in the plan. Beneficiary designations always take precedence.
Some estate plans include additional documents, such as a revocable living trust. You create a living trust and transfer ownership of your assets to it during your lifetime. You can generally be your own trustee and name a successor to take over if you can’t manage your own affairs. Because the trust is revocable, you have the option of changing or even ending it at any time.
You still need a will, however, to name a guardian for minor children or to direct that any of your assets that did not get transferred to the trust during your lifetime be “poured over” into it after your death.
All of the assets you put in a living trust before your death avoid probate, which is the legal process for gathering your assets after death, paying your debts and distributing the property to your heirs. But a living trust does not help you save on income taxes; you continue to pay income tax on the trust’s earnings on your personal Form 1040. The assets are also part of your taxable estate.
Midlife checkup
Although everyone should have a basic estate plan that includes a will, specific issues take on special importance at certain points in your life. In particular, midlife couples should:
Pin down durable powers of attorney for financial matters and health care, plus living wills. Create an emergency plan in case a caregiver spouse becomes ill.
Review your pension plan to make sure your spouse understands all of the provisions.
If you own a vacation home in another state, consider putting it into a revocable living trust so that your heirs can avoid probate in that state.
Look into buying long-term-care insurance.
Speak up
Whatever provisions you make in your estate plan, it’s best to tell family members your intentions. It’s better to prepare them now than to surprise them later, especially if you don’t plan to divide your assets equally among members of your family.
And it’s important to update your estate plan to reflect changes in your family’s circumstances. When Carolyn Roberts got divorced 30 years ago, she wrote a will specifying that all of her assets were to be put in trust for her three children, then ages 7, 5 and 3, until they reached age 21, with her brother as trustee.
Twenty years later, she remarried. Her new husband, Laurence Roberts, also had three grown children. At the time, Larry had built up savings and was close to paying off the house he had owned for 17 years. Carolyn had little savings and little equity in her co-op apartment. When they wrote their wills, Larry left his assets to his children, and Carolyn left her property to her kids.
Because of Carolyn’s unhappy experience in her first marriage, she and Larry specified that should any of their children die before they did, the inheritance would go to the grandchildren rather than to the child’s spouse. One of Carolyn’s children would be co-executor with Larry if anything happened to her; one of Larry’s children would be co-executor with Carolyn if anything happened to him.
After Carolyn and Larry were married for a decade, they decided to redo their wills. They have built up savings together and recently bought a bigger house, which Carolyn renovated to include a huge basement playroom for their grandchildren, in Livonia, Mich. This time they decided to split things evenly among all of their children. But even though their children are now grown, Carolyn and Larry attached strings to their plan. “If somebody is in financial trouble, is being sued or has drug or alcohol problems, the executors will hold off on giving them their inheritance,” says Carolyn.
Hire a lawyer?
If your needs are simple, a do-it-yourself software program, such as Quicken WillMaker Plus 2007 ($50 on CD, $40 as a download from http://www.nolo.com/), may be all you need. However, if you have children from more than one marriage, have a spouse or child who is disabled, own a business, are a partner in an unmarried couple or have enough assets to run afoul of the federal estate tax, you should get expert help from a lawyer who specializes in estate planning.
Fees vary widely, depending on your situation and where you live. Relatively simple wills for a married couple—including trusts for children, durable powers of attorney, a living will and a review of all beneficiary designations—might cost less than $500. Drafting a separate revocable living trust might add $1,000 to $1,500 to the tab, and planning to minimize the estate tax is likely to cost even more.
You can find an estate-planning lawyer through the American College of Trust and Estate Counsel (http://www.actec.org/) or at http://www.lawyers.com/.
http://video.msn.com/?mkt=en-us&brand=money&vid=c18d8ff3-dc49-451d-8c29-6cadda8e47fc&playlist=videoByTag:tag:money_top_investing:ns:MSNmoney_Gallery:mk:us:vs:1&from=MSNmoney_Roth401kBringsTaxFreeRetirementCloser&tab=s216
Inherit Money?
Advice:
Your first move should be to deposit your new wealth in a bank or brokerage account, advises Martin Shenkman, a tax and estate lawyer in Teaneck, N.J.
With the money tucked safely away, there's no need to make hasty decisions about what to do with it.
Your mortgage may be the one debt you want to keep, if you've locked into a relatively low interest rate and aren't planning to retire right away. Paying off a 5.5% mortgage, for example, is the equivalent of earning 5.5% on your money. On average, you should be able to earn 7% or 8% annually on a good mix of stocks and bonds, a more profitable use of your funds. Paying off your loan also means losing the tax deduction for mortgage interest.
Taxes
Some inheritances, such as life insurance proceeds, are tax free. But, depending on its size, an estate may be subject to federal or state estate taxes. In 2007, estates worth up to $2 million are exempt from federal estate taxes. But more than a dozen states levy their own estate tax, often on smaller estates, and a few states require heirs to pay an inheritance tax.
Record the value of everything you inherit as of the date of your benefactor's death. That date usually determines your new cost basis for tax purposes; you'll be taxed on any appreciation from then until the date you sell the asset.
Inheriting a retirement account, such as a 401(k) or a traditional individual retirement account, is tricky business that requires professional advice. The rules vary depending on whether you're a spouse, a named beneficiary of the account or an heir named in the will.
You can usually inherit a Roth IRA without tax consequences, but that's not true of a regular IRA. If you simply withdraw the money from an IRA or 401(k), you'll owe taxes on the entire amount. Only if the benefactor is a spouse can you roll over an inherited IRA into your own IRA.
The best strategy would be to retitle the inherited IRA as a "beneficiary IRA" in your name and that of the deceased. That way, the money will continue to accrue tax-deferred earnings. In the year after the original owner's death, you will be required to begin taking annual withdrawals based on your life expectancy. Rules approved by Congress in 2006 allow you to convert an inherited 401(k) to a beneficiary IRA and handle it the same way. Previously, only spouses could transfer a 401(k) to their own IRA.
Investing
Don't let sentiment influence the way you handle an inheritance. A portfolio of bonds makes no sense if you're depending on asset growth to finance three decades of retirement, for example. Or perhaps your benefactor hung on to a large stock position to avoid a big tax bill. With the tax slate wiped clean, this could be the time to sell and start fresh.
If you plan to work for another decade or longer, you can afford to take more risk, putting 80% or more of your inheritance into a diversified mix of stocks or stock funds. But if you plan to retire in less than 10 years, keep one-third of the money in bonds. And if you're ready to retire and need to tap your investments for living expenses, up your bond allocation to 40%, with the remainder in stocks.
If your time horizon is shorter -- say, if you're funding college for your teenage children -- you should be more conservative, stashing at least half of your money in high-quality short- or intermediate-term bonds or bond funds. Through a state plan, the Grabskis prepaid tuition for all of their children at any public college in Virginia.
This article was reported and written by Steven Goldberg for Kiplinger's Personal Finance Magazine
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
Stretch Your IRA to Last for Generations
Tax-deferred assets can grow for decades if your heirs don't make mistakes.June 2006
You've built up a nice pile of cash in an IRA, but you don't need the money for your retirement. You want to pass on the account to your kids. If all goes as planned, the assets in this tax-deferred account will continue to grow, perhaps well into their retirement. Even your grandchildren could benefit.
But if you want to stretch your IRA tax shelter to last an extra generation or two, your heirs need to follow some very complex rules. Any slip-up could result in accelerating the cash-out and the tax bill that goes along with it.
To show the potential of the stretch strategy, MFS Investment Management offers this illustration: Dad has $100,000 in a traditional IRA, and dies at age 68. His 58-year-old wife, who doesn't need the money, rolls over the cash into her own IRA. But she doesn't touch it until she's 70 1/2, when the IRS requires her to take annual minimum distributions. (At that age, her distributions can be spread over 27 years.) She dies at 80, having netted, after taxes, $92,820. Her daughter, Anne, who is 50, takes distributions based on her own life expectancy; by the time she dies at 77, she's received net income of $371,971. Anne's son, the grandson of the original owner, pulls out $315,467 over nine years. Total after-tax payout: $780,259 over 46 years.Of course, this scenario is based on a number of assumptions, such as a 6% annual return on the account, 2005 tax rates and heirs who withdraw only the required minimum. "Part of this is having the confidence that your kids won't take out more," says Richard Johnson, an estate-planning lawyer with Waller Lansden Dortch & Davis in Nashville.So it's a good idea to sit down with your heirs and explain the benefits of the stretch -- and the inadvertent ways they could bungle the whole thing. Here's how to make your IRA last for generations.
Roll over your company plan.
If maintaining the tax shelter as long as possible is important to you, roll over any money left in a 401(k) or other company plan into an IRA. (The exception could be if you have a large amount of appreciated company stock. See "Your Questions Answered," April.) Most 401(k) plans force heirs to quickly cash out. Designate your beneficiaries. Whether it's a new IRA or an old one, make sure you name a primary beneficiary, usually your spouse. Also designate contingent beneficiaries, perhaps your children, in case your primary beneficiary dies before you. Or you can name your grandchildren. "They have the longest life expectancy, and the money compounds longer," says Philip Kavesh, an estate-planning lawyer with Kavesh, Minor and Otis in Torrance, Cal. "A 10-year-old's minimum distribution is very small and can go into a custodial account."If you do not designate beneficiaries, your IRA could end up in your estate. That would deny your heirs the chance to tie payouts to their own life expectancies. How fast they must withdraw depends on when you die, says Ed Slott, an IRA expert (www.irahelp.com). If there's no designated beneficiary and you die after 70 1/2, the minimum withdrawal would be based on what would have been your remaining life expectancy. If you die before 70 1/2, your heirs must cash out the entire account by the end of the fifth year following the year of your death.
Educate your spouse.
If a widow younger than 59 1/2 needs the money, she should keep it in her husband's IRA; if she rolled over the money into her own IRA, she would pay a 10% penalty on the early distributions taken before age 59 1/2. But if she continues to keep the money in her husband's account and then dies, the contingent beneficiaries would have to take distributions based on her life expectancy.If she wants her children to be able to take withdrawals over their lifetimes, she has two choices. She can "disclaim" the money, meaning it goes directly to the contingent beneficiaries. Or she can roll over the account into her own IRA. She would then designate beneficiaries, who could take distributions based on their longer life expectancies when she dies.Alert the next generation of the pitfalls. Make sure your spouse and other beneficiaries don't allow an adviser to liquidate the account and cut a check. Your beneficiaries will pay taxes on the distribution and lose the chance for tax-deferred growth.Also, note that only a surviving spouse has the right to roll over an inherited IRA into his or her own account. If your children or any other beneficiary cashes out an account in hopes of doing so, the full amount is taxable. If you have multiple beneficiaries, they may want to split your IRA into several "beneficiary IRAs" after you die. That way, says Vicky Schroebel, an MFS Investment vice-president, "each one can do the stretch the way they want. One may want to take the money and run, while another could allow the balance to grow tax-deferred."But Slott warns that the splitting must be done correctly or the money becomes taxable. "The average bank messes this up," he says. The split must take place by the end of the year after the owner's death. Each new account must be titled "beneficiary account" or "inherited account," and the deceased owner's name must remain on each account. Then the custodian of the IRA must conduct a direct trustee-to-trustee transfer to each beneficiary account.If stretching your IRA tax shelter to the nth degree is your ultimate goal, consider converting your IRA to a Roth. A demand that payouts start at age 70 1/2 doesn't apply to a Roth, so you could let your account grow until death. At that point, your beneficiaries could stretch payouts over their life expectancies and never owe tax on withdrawals.
.............................................................................................
Keep Your Wealth in the Family
It's important to get your paperwork in order, and let your kids into the loop.
By Ronaleen Roha
September 2006
Editor's note: This article appears in Kiplinger's special issue Success With Your Money.
Deciding how to leave assets to your heirs can be difficult even for the most agreeable of spouses, as Bud and Jacqui Reinfeld can testify. The Reinfelds have several nieces and nephews they would like to provide for, and when they got down to planning their estates after 35 years of marriage, they figured it would be easy.
And it was, for the most part. Both wanted to make the division as equitable as possible. But when it turned out that Jacqui had already promised their house to one of their nieces, that presented a problem.
To work things out, the Reinfelds, who live in Los Angeles, sought help from Michael Eisenberg, a certified public accountant and financial planner. He helped them draw up a formula that takes into account a possible increase or decrease in the value of the house. “People are amazed at what they don’t know about estate planning,” says Eisenberg. “Once they learn about what they can do, they loosen up a bit.”
Says Bud Reinfeld, “You have to be able to talk to someone who can help you work through the issues.”
Pieces of the plan
As the Reinfelds discovered, an estate plan should be customized to fit your specific goals and circumstances. But every well-crafted plan should include the following pieces:
A will.
Nearly 60% of Americans don’t have a will, according to a survey by Lawyers.com, an online database of lawyers from legal publishers LexisNexis Martindale-Hubbell. A will lets you distribute your assets as you choose. The person you name to be your executor or personal representative will gather your assets after your death, handle any probate proceedings and ultimately distribute your assets to your heirs or trustees.
A durable power of attorney for financial matters.
Only 26% of those surveyed by Lawyers.com have this valuable document, which names someone to handle your financial affairs if you are unable to do so. A durable power of attorney can go into effect as soon as it is signed. But most states permit a “springing” power that takes effect only if you become incapacitated.
A living will and a durable power of attorney for health care.
A health-care power of attorney names someone to make health-care decisions on your behalf if you can’t. It applies even if you’re temporarily incapacitated, by an auto accident, for example. A living will spells out your wishes regarding life-sustaining treatment. It generally takes effect only if you become terminally ill and can’t speak for yourself, or if you are in a persistent vegetative state.
Despite the publicity generated by the case of Terri Schiavo, the Florida woman whose husband and family battled over her treatment after she had been in a persistent vegetative state for 13 years, fewer than 30% of Americans have drafted these documents.
A review of beneficiary designations.
Beneficiary designations on assets such as life-insurance policies and IRAs can foil a great estate plan if they contradict other provisions in the plan. Beneficiary designations always take precedence.
Some estate plans include additional documents, such as a revocable living trust. You create a living trust and transfer ownership of your assets to it during your lifetime. You can generally be your own trustee and name a successor to take over if you can’t manage your own affairs. Because the trust is revocable, you have the option of changing or even ending it at any time.
You still need a will, however, to name a guardian for minor children or to direct that any of your assets that did not get transferred to the trust during your lifetime be “poured over” into it after your death.
All of the assets you put in a living trust before your death avoid probate, which is the legal process for gathering your assets after death, paying your debts and distributing the property to your heirs. But a living trust does not help you save on income taxes; you continue to pay income tax on the trust’s earnings on your personal Form 1040. The assets are also part of your taxable estate.
Midlife checkup
Although everyone should have a basic estate plan that includes a will, specific issues take on special importance at certain points in your life. In particular, midlife couples should:
Pin down durable powers of attorney for financial matters and health care, plus living wills. Create an emergency plan in case a caregiver spouse becomes ill.
Review your pension plan to make sure your spouse understands all of the provisions.
If you own a vacation home in another state, consider putting it into a revocable living trust so that your heirs can avoid probate in that state.
Look into buying long-term-care insurance.
Speak up
Whatever provisions you make in your estate plan, it’s best to tell family members your intentions. It’s better to prepare them now than to surprise them later, especially if you don’t plan to divide your assets equally among members of your family.
And it’s important to update your estate plan to reflect changes in your family’s circumstances. When Carolyn Roberts got divorced 30 years ago, she wrote a will specifying that all of her assets were to be put in trust for her three children, then ages 7, 5 and 3, until they reached age 21, with her brother as trustee.
Twenty years later, she remarried. Her new husband, Laurence Roberts, also had three grown children. At the time, Larry had built up savings and was close to paying off the house he had owned for 17 years. Carolyn had little savings and little equity in her co-op apartment. When they wrote their wills, Larry left his assets to his children, and Carolyn left her property to her kids.
Because of Carolyn’s unhappy experience in her first marriage, she and Larry specified that should any of their children die before they did, the inheritance would go to the grandchildren rather than to the child’s spouse. One of Carolyn’s children would be co-executor with Larry if anything happened to her; one of Larry’s children would be co-executor with Carolyn if anything happened to him.
After Carolyn and Larry were married for a decade, they decided to redo their wills. They have built up savings together and recently bought a bigger house, which Carolyn renovated to include a huge basement playroom for their grandchildren, in Livonia, Mich. This time they decided to split things evenly among all of their children. But even though their children are now grown, Carolyn and Larry attached strings to their plan. “If somebody is in financial trouble, is being sued or has drug or alcohol problems, the executors will hold off on giving them their inheritance,” says Carolyn.
Hire a lawyer?
If your needs are simple, a do-it-yourself software program, such as Quicken WillMaker Plus 2007 ($50 on CD, $40 as a download from http://www.nolo.com/), may be all you need. However, if you have children from more than one marriage, have a spouse or child who is disabled, own a business, are a partner in an unmarried couple or have enough assets to run afoul of the federal estate tax, you should get expert help from a lawyer who specializes in estate planning.
Fees vary widely, depending on your situation and where you live. Relatively simple wills for a married couple—including trusts for children, durable powers of attorney, a living will and a review of all beneficiary designations—might cost less than $500. Drafting a separate revocable living trust might add $1,000 to $1,500 to the tab, and planning to minimize the estate tax is likely to cost even more.
You can find an estate-planning lawyer through the American College of Trust and Estate Counsel (http://www.actec.org/) or at http://www.lawyers.com/.
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