Death and Taxes
Planning ahead makes things easier on your loved ones.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information

The “Financial Planning 101” series will wrap up with a look at estate planning fundamentals. Many people treat estate planning like a trip to the dentist—they avoid it until there is an emergency. Proper preventive care in estate planning, however, can minimize long-term problems.

Basic tools: There are several estate-planning documents that everyone—married, single, young, or old—should have drafted and then updated on a regular basis. They include a simple will, a living will, and a health care power of attorney, also known as health care proxy.

The simple will leaves your property to the people and organizations you designate, names your executor (also called a personal representative) to handle your affairs, designates guardians for minor children, and designates someone to handle money and property left to minor children.

The living will makes your wishes known concerning the extent of medical intervention you desire should you become seriously ill or injured and unable to speak for yourself. Living wills indicate whether you want measures such as life support used to prolong your life if there is little or no hope of recovery.

The health care proxy designates someone to make medical decisions on your behalf if you are ill or injured and unable to communicate your medical preferences. The proxy allows the designated person(s) to consent to or refuse medical treatment, hire and fire medical personnel, and gain access to medical records.

Many attorneys combine the living will and health care proxy into a single document known as an advance directive for health care. You should store the originals in a safe place, but it also is a good idea to have a copy of your living will and health care proxy on file with your personal physician and with the person you have designated as your health care attorney-in-fact.

Advanced tools: Although the basics work well for most, those who have accumulated significant assets ($1.5 million in 2004), own real estate in more than one state, live in states with high probate fees, or are part of a blended family (children on one or both sides from a previous marriage) might need to incorporate additional estate-planning tools. These include the credit shelter trust and the revocable living trust (RLT).

The credit shelter trust allows married couples to maximize their federal estate tax exemption by creating a trust on the death of the first spouse. This trust can be funded with assets up to the current estate tax exemption limit. Income and principal from the trust can be used to support the surviving spouse while he or she is alive, with the remainder distributed to beneficiaries on the death of the second spouse estate-tax free.

Under the current law, such an arrangement allows a married couple to pass on up to $3 million to heirs without triggering the federal estate tax. However, some states impose a state death tax or state estate tax that is “uncoupled” from the federal estate tax system. This means asset levels considerably lower than $1.5 million could trigger state death or estate taxes.

The RLT is useful in states with high probate fees, when real property is owned in multiple states, or when people want privacy in their estate settlement process. This trust creates an entity that can hold investment assets, valuable personal property, and real property and removes it from the probate estate. This allows the owner(s) of the RLT to avoid probate fees on the assets. However, an asset must be “retitled” into the trust for it to be effective. Unfortunately, nearly 50 percent of created RLTs never are funded.