Estate Planning

Wednesday, July 25, 2012

You have a healthcare directive. Now what?

You’ve Finally Done Your Healthcare Directives – Now What?

Healthcare directives can be vitally important, as recent cases, like that of Terry Schiavo, clearly brought to light. These important documents can mean the difference between your health care wishes being carried out or family members fighting over whether a loved one should be placed in a nursing home or removed from life support. Healthcare directives usually include both a healthcare power of attorney and a living will. In a healthcare power of attorney, an individual authorizes another individual to make healthcare decisions for him or her if the individual becomes unable to do so. A living will expresses an individual’s preferences about life support.

Once you have executed your healthcare directives, you may be uncertain as to what to do with them. First, you should make copies of the documents and inform others of their existence. In addition to your health care agent, persons you should consider notifying of the directives include family members and your health care providers. Ideally, the originals should be kept in a place that is both safe and easily accessible.

You may wish to consider using a secure registry service to store your healthcare directives. Such services allow you to access healthcare directives any time and in any location with access to the Internet. Some also allow the documents to be accessed via an automated fax-back service. In addition to providing the healthcare directives, many registries also allow caregivers to access information like emergency contacts, allergies, and other pertinent medical information. If you are a part of our Preferred Client Maintenance Program, this service is provided by Legal Vault beginning January 1, 2013. For all our other clients, you may call to become part of our Preferred Client Maintenance Program and receive this valuable benefit.

You should review your healthcare directives regularly. As individuals get older, their preferences about health care and life support change, and it’s important that your directives reflect your current health care wishes. Of course, life changing events such as marriage, divorce, or the death of a loved one typically require changes in those documents to ensure that the people named in them are still those you wish to make decisions on your behalf.

Moving to another state? It is best to update your healthcare directives to ensure they are valid so your wishes will be carried out in the manner you desire.

Establishing your healthcare directives can spare your family a great deal of anguish if they need to make decisions at a time that is already very emotionally-charged. By keeping the documents in a secure place, providing copies to loved ones, and reviewing them regularly, you can be more certain that your healthcare wishes will be carried out.

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Wednesday, July 11, 2012

Are your retirement accounts in order?

Retirement Accounts and Estate Planning

For many Americans, retirement accounts comprise a substantial portion of their wealth. When planning your estate, it is important to consider the ramifications of tax-deferred retirement accounts, such as 401(k) and 403(b) accounts and traditional IRAs. (Roth IRAs are not tax-deferred accounts and are therefore treated differently). One of the primary goals of any estate plan is to pass your assets to your beneficiaries in a way that enables them to pay the lowest possible tax.

Generally, receiving inherited property is not a transaction that is subject to income tax. However, that is not the case with tax-deferred retirement accounts, which represent income for which the government has not previously collected income tax. Money cannot be kept in an IRA indefinitely; it must be distributed according to federal regulations. The amount that must be distributed annually is known as the required minimum distribution (RMD). If the distributions do not equal the RMD, beneficiaries may be forced to pay a 50% excise tax on the amount that was not distributed as required.

After death, the beneficiaries typically will owe income tax on the amount withdrawn from the decedent’s retirement account. Beneficiaries must take distributions from the account based on the IRS’s life expectancy tables, and these distributions are taxed as ordinary income. If there is more than one beneficiary, the one with the shortest life expectancy is the designated beneficiary for distribution purposes. Proper estate planning techniques should afford the beneficiaries a way to defer this income tax for as long as possible by delaying withdrawals from the tax-deferred retirement account.

The most tax-favorable situation occurs when the decedent’s spouse is the named beneficiary of the account. The spouse is the only person who has the option to roll over the account into his or her own IRA. In doing so, the surviving spouse can defer withdrawals until he or she turns 70 ½; whereas any other beneficiary must start withdrawing money the year after the decedent’s death.

Generally, a revocable trust should not be the beneficiary of a tax-deferred retirement account, as this situation limits the potential for income tax deferral. A trust may be the preferred option if a life expectancy payout option or spousal rollover are unimportant or unavailable, but this should be discussed in detail with an experienced estate planning attorney. Additionally, there are situations where income tax deferral is not a consideration, such as when an IRA or 401(k) requires a lump-sum distribution upon death, when a beneficiary will liquidate the account upon the decedent’s death for an immediate need, or if the amount is so small that it will not result in a substantial amount of additional income tax.

The bottom line is that trusts typically should be avoided as beneficiaries of tax-deferred retirement accounts, unless there is a compelling non-tax-related reason that outweighs the lost income tax deferral of using a trust. This is a complex area of law involving inheritance and tax implications that should be fully considered with the aid of an experienced estate planning lawyer.

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