Essential Estate-Planning Beyond a Will
You're ahead of the game if you have a will governing where your assets will go when you die. But before you get too smug, check out the four critical planning moves you should take right now. If you don't cover these four bases — plus one in special cases — you risk costing your family time, money, and worry.
1. Establish a health-care proxy
- What is it for? Also called a health-care power of attorney, this appoints a trusted person to make health-care decisions on your behalf if you are incapacitated.
- Tip: Don't confuse it with a durable power of attorney, which only governs financial decisions.
2. Establish a durable power of attorney
- What is it for? This document empowers the person of your choice to handle your financial affairs, including selling assets and tapping savings to pay health-care bills, if you are unconscious or incapacitated.
- How do I appoint one? Standard health-care proxy and durable power of attorney forms are available from law offices and most bar associations, but there's nothing standard about choosing an agent.
- Tip: Especially for a health-care proxy, you're picking a person who can make life-and-death decisions for you. Be sure to discuss your feelings with them on end-of-life issues such as resuscitation and artificial respiration, nutrition and hydration.
3. Prepare a living will
- What is it for? This document states your wishes on when and whether to withdraw life support or other life-sustaining measures. Like a durable power of attorney, it needs to cover as many scenarios as possible.
- Who do I tell? A living will won't do you any good if no one knows about it. Give copies to your proxy, your loved ones and your lawyer.
- Tip: If your affairs are complicated or you aren't sure about your rights, consult a lawyer to prepare these end-of-life documents.
4. Check your beneficiaries
- Why? Be sure you have the right people designated as beneficiaries for your IRA, employer-sponsored 401(k) plan and other investment accounts and that they match the beneficiaries in your will. Review these beneficiaries every three to five years or whenever there's a major life change such as a divorce, birth or death. Also see that your documents are where your heirs can find them.
- What about taxes? Don't forget to factor in tax implications and other ramifications when choosing beneficiaries. An attorney may be able to set up a trust arrangement that helps ensure that the assets you bequeath stay with your heirs even if they are divorced, are sued or die.
5. A special step for some IRAs
It used to be that leaving assets in a retirement plan to a non-spouse triggered a big tax bite because the beneficiary typically was forced to cash it out. Now, you can avoid that hurdle. But it's not easy.
To avoid taxes, the beneficiary must roll the assets into an IRA via a direct trustee-to-trustee transfer, without the money passing through his or her hands. Here's the odd part: The IRA must be in the name of the deceased, with the recipient named as beneficiary of the account. From there, the money falls under the required minimum withdrawal rules for inherited IRAs, and they're complicated.
If you find yourself in this situation, you're best bet is to find an attorney or accountant who is a specialist in the intricacies of IRA rules.
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