Protect Yourself – Not Just Your Heirs – With Your Estate Plan

Experts urge people to develop estate plans to make sure you get to choose who will inherit from you and how much, and to select additional options that are available through legal documents, like trust agreements. It can be easy to procrastinate about putting the time and effort into going through this process, if you do not see a direct benefit to yourself. However, having an estate plan can also have a dramatic effect on your life. You can protect yourself – not just your heirs – with your estate plan.

Living the Dream

You can have your elder law attorney draft documents that can make it possible for you to live your dream life, without a care in the world. Let’s say that you want to sail around the world for a few years or serve a tour of duty in the 50+ section of the Peace Corps. You cannot unplug 100 percent from the everyday world. Someone will have to pay your unavoidable bills, file your taxes and manage your money, when you are away and out of reach.

If you know someone whom you can trust without reservation, your lawyer can draft a financial power of attorney for the person you designate (your agent) to handle as many or as few business matters as you specify. You can revoke the power of attorney whenever you want, as long as you have the legal capacity to do so.

In other words, if the law would allow you to draft a valid power of attorney now, you have the legal capacity to revoke one. If you have become incompetent, for example, from an illness or injury, you cannot change the power of attorney, until or unless you regain competency.

Planning for the Worst

Your power of attorney will automatically expire, if you become incapacitated, unless you make sure that the document is a “durable” power of attorney. Being durable means that, at the time that you signed the paper, you intended for the document to continue in effect, if you could not manage matters for yourself.

If you do not have a durable power of attorney and one day you have a stroke or a catastrophic car crash, by way of example, the courts will decide who will make your financial decisions for you. Your family will have to file a request with the court (and pay the court costs to do so), wait for a hearing date, and get a ruling from a judge – a person who has never met you or your family. By the way, the judge will be required to appoint an independent attorney to represent you against your family, to protect your interests. If you prefer to have control over this decision rather than a total stranger, get a durable power of attorney.

Trusts are for the Living

Many people think of setting up a trust as a way to pass their assets to their loved ones privately and quickly, without having to go through the probate courts. While that is one of the purposes for trusts, you can also set up a living trust to stipulate how you want your assets, investments and other financial matters handled, if you become incapacitated.

You can even lay out how you want your business run, if you own a company. You can name someone to serve as your guardian and name a conservator who will manage your finances. You can also let a total stranger make these decisions.

Be sure to talk with an elder law attorney in your area, because this article is about the general law.  Your state’s rules might vary from the general law.

References:

American Bar Association. Power of Attorney. (Accessed April 4, 2019) https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/power_of_attorney/

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Should You Take a Lump-Sum Pension Payment?

Those of you who are already retired and collecting a company-paid pension might receive a tempting offer from your former company. Many companies are giving their pensioners the option of trading in their guarantee of life-long pension payments for a one-time lump-sum payment.

The offer might look generous. Some people get buyouts of $300,000 or $400,000 or more.  This sounds like a sizeable amount, but there is no assurance that the money will last for the rest of your life. This is unlike a pension, which keeps paying as long as you live. If you currently receive a company-paid pension, you should analyze the issue before you get an offer, so that you will not get caught up in the excitement of the dollar signs. Should you take a lump-sum pension payment?

What People Do with Their Lump-Sum Buyouts

A survey of retired people who took lump-sum buyouts, instead of a monthly pension check for life, revealed some disheartening news. More than 20 percent of those individuals spent all of the money in a little more than five years. Even those who did not spend all of their money in the first five years, had anxiety about whether they would have enough money for the rest of their lives.

The vast majority of people who take the lump-sum option, spend it on things that are not retirement needs. For example, nearly two-thirds of the people who got pension buyouts spend a portion of that money within one year on things like luxury items, home improvements and vacations. On the plus side, 30 percent of the people paid down debt or other expenses with some of their lump-sum funds. Paying off debt is usually wise financial management, but doing so with the lump-sum proceeds decreases the buyout money available for ongoing living expenses.

Who Benefits from a Lump-Sum Buyout

A buyout is seldom to the benefit of the retired employee. Let’s say that a 65-year-old retiree gets a company pension of $30,000 a year. If he accepts a $300,000 buyout and sticks it in the bank, it will be gone in 10 years at $30,000 a year. He could invest the money, but since conservative investments tend to produce low returns, he is unlikely to make enough investment earnings to keep the money paying him $30,000 a year for the rest of his life.

In some situations, it can benefit the retiree to accept a lump-sum buyout. If the retiree has a terminal illness with a very short life expectancy, for example, he could get more money through a buyout than with monthly payments for life. On the other hand, a medical prognosis is only a best guess, and not a guarantee.

Why Companies Switched from Pensions to 401(k) Plans

Companies bore all the risk of the market, when they provided private pensions for their retirees. Whether the market went up or down, and whether the cost of living went up or not, the companies still had to find a way to make their monthly pension payments. With 401(k) plans, the employer pays a specified percentage and has no further responsibility. If the account loses money, the employer does not have to come up with more funds for the retiree.

With 401(k) plans, employees also have to contribute much of the money to the plan. With company pensions, the employer had to fund the account. Finally, once a company pays its portion into a 401(k) account, the firm has completed its requirements. Maintaining pensions forces the employer into long-term financial commitments.

The upside of 401(k) accounts is that the employee has much more control over the management of the assets. The employee can direct how the money gets invested. Anyone who has worked for a mismanaged company knows how precarious it can be to stake your financial future on something over which you have little to no control.

References:

AARP. “Treasury Department Oks More Lump-Sum Pension Payments.” (accessed March 23, 2019) https://www.aarp.org/retirement/planning-for-retirement/info-2019/lump-sum-payments-for-pensions.html

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Spring is Financial Cleaning Season

It’s time to clean out, tidy up and purge our homes of things we don’t use, don’t need and haven’t worn in five years. This is also the season where we gather up all of our financial documents and do our taxes, says The Press Enterprise in the article “Add this to Kondo-spring cleaning list: Organize your finances.” While cleaning out paperwork may not feel as rewarding as piling up clothing to donate to a local charity, the time and energy saved will be appreciated in years to come.

Start by making a monthly payment schedule with company name, due date and amount due. Include estimated taxes, property taxes, insurance premiums and any other bills that you receive on a routine basis. Use this to help budget and plan for the coming year.

Set up electronic bill paying through your bank for recurring bills. You can make your mortgage payments, insurance and all predictable expenses occur automatically. Keep all paper bills that arrive by mail, like property tax and insurance premium notices, until they are paid.

Schedule a set time to pay your bills. That may be weekly, biweekly, or monthly, but make an appointment for yourself and stick to it. During this time, review your monthly payment schedule, review statements for accuracy, pay and then either file or toss.

Set up systems for your important documents. Don’t just stuff them in a file cabinet. Use a manual filing system, a three-ring binder, electronic scanning and storage or a combination of a few different methods. If you go all digital, make sure you have an encrypted and automatic back-up system.

If you don’t already have one, open a safe deposit box or purchase a highly-rated fireproof safe to store documents like birth certificates, marriage licenses, deeds, car registrations, estate planning documents and passports. Tell family members where these documents are located and provide instructions so they can be accessed in an emergency. In addition to yourself and your spouse, give a family member the ability to access your safe deposit box.

Consolidate your accounts. If you have more than one checking, savings, retirement or brokerage account, try to simplify your life by combining like accounts. Fewer accounts mean fewer statements, less paperwork and less hassle, when filing taxes.

The same goes for credit cards. If you can’t close cards because of outstanding balances, create a spreadsheet of outstanding balances, the interest rates you are paying and payment dates for each. Get serious about paying them off, attacking the ones with the highest interest rates first.

If you haven’t reviewed your estate plan or your beneficiary designations, review all your accounts and estate planning documents. This is a good time to make an appointment with your estate planning attorney, especially if you haven’t reviewed your estate plan in three or four years.

Reference: The Press-Enterprise (March 30, 2019) “Add this to Kondo-spring cleaning list: Organize your finances”

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What Are the Common Myths of Powers of Attorney?

The Lubbock Avalanche-Journal’s recent article entitled “Five common myths about powers of attorney” explains away some misconceptions about powers of attorney.

  1. There’s just one uniform power of attorney document. No, there are many types. However, they can vary by state. Talk to an experienced estate planning attorney to draft a document to meet your specific needs.
  2. It’s OK to sign a power of attorney, even if I lack mental capacity. No, to be valid, the person granting the rights (the principal) must have mental capacity to execute the document. A power of attorney can be valid for an individual with mental incapacity, provided the document was signed before the occurrence. That’s a key reason to have a durable power of attorney in place.
  3. A durable power of attorney and healthcare power of attorney are the same thing. No, a durable power of attorney grants rights to an agent to act on your behalf, regarding your assets. These rights can be general to all assets for an unlimited time, or the POA can be limited as to the time frame and assets included. A medical power of attorney grants an agent the authority to make medical decisions on your behalf.
  4. Senior citizens are the ones who need a power of attorney. Not true, because accidents and unforeseen illness can strike at any age. You need to have a plan in place to ease the burden of one aspect of an already stressful and complicated situation. Don’t assume your spouse has automatic power to make decisions on your behalf. It can be much more difficult, unless you have given them the power of attorney.
  5. A power of attorney can be used to handle my relative’s estate at death. Again, not true. Although there are other ways to structure an estate to avoid probate, a power of attorney isn’t one of them. A power of attorney lets the agent to stand in the place of the principal to make decisions. It doesn’t continue beyond the death of the principal.

If you avoid these common misconceptions, a power of attorney can be a very useful tool to meet your needs.

Reference: Lubbock Avalanche-Journal (March 15, 2019) “Five common myths about powers of attorney”

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How Do I Cash in My Life Insurance Policy?

There are some drawbacks to using life insurance to meet immediate cash needs, especially if you’re compromising your long-term goals or your family’s financial future. Investopedia’s recent article “Cashing in Your Life Insurance Policy” says that if other options are not available, life insurance—especially cash-value life insurance—can be a source of needed income.

Cash-value life insurance, like whole life and universal life, builds reserves through excess premiums plus earnings. These deposits are held in a cash-accumulation account within the policy. You can access cash accumulations within the policy through withdrawals, policy loans, or partial or full surrender of the policy. Another alternative is selling your policy for cash, known as a life settlement. Note that although cash from the policy might be useful during stressful financial times, you could face unwanted consequences, depending on the method you use to access the funds.

You can usually withdraw limited cash from a life insurance policy, based on the type of policy you own and the insurance company. The big advantage is that the withdrawals aren’t taxable up to your policy basis, as long as your policy isn’t classified as a modified endowment contract (MEC). However, these can have unexpected or unrealized consequences. Withdrawals that decrease your cash value, could cause a reduction in your death benefits. This is a potential source of funds you or your family might need for income replacement, business purposes or wealth preservation. Cash-value withdrawals also aren’t always tax-free. If you take a withdrawal during the first 15 years of the policy, and the withdrawal causes a reduction in the policy’s death benefit, some or all of the withdrawn cash could be subject to tax. Withdrawals are treated as taxable, to the extent that they exceed your basis in the policy.

Withdrawals that reduce your cash surrender value could mean higher premiums to maintain the same death benefit, or the policy could lapse.

If your policy is determined to be an MEC, withdrawals are taxed, according to the rules applicable to annuities–cash disbursements are considered to be made from interest first and are subject to income tax and possibly a 10% early-withdrawal penalty, if you’re under age 59½ at the time of the withdrawal. Policy loans are treated as distributions, so the amount of the loan up to the earnings in the policy will be taxable and could also be subject to the pre-59½ early-withdrawal penalty.

Surrendering the policy can provide the cash you need, but you’re relinquishing the right to the death-benefit protection. You can sell your life insurance policy to a life settlement company in exchange for cash. The new owner will keep the policy in force (by paying the premiums) and get a return on the investment, by receiving the death benefit when you die.

To qualify for a life settlement, the insured must be at least 65 years old, have a life expectancy of 10 to 15 years or less, and usually have a policy death benefit of at least $100,000. However, the taxation of life settlements is complicated. The gain in excess of your basis in the policy is taxed to you as ordinary income. In addition to the tax liability, life settlements usually include up to a 30% in commissions and fees, which reduces the net amount you receive.

Reference: Investopedia (January 9, 2019) “Cashing in Your Life Insurance Policy”

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Will Helps Avoid Problems and Expenses for Family

Having a will and an estate plan makes passing along assets much easier for the family. Having necessary documents like a power of attorney and a health care power of attorney lets the family make decisions for a loved one, who has become incapacitated. These are estate planning basics, as reported by WKBN 27 in the article “Attorney recommends everyone have a will in place to prevent avoidable issues.”

Think of the will as a way to speak for yourself, when you have passed away. It’s the instructions for what you want to happen to your property, when you die. If there’s a will, the executor is responsible for carrying out your requests. With no will, a court will have to make these decisions.

Many people believe that if they don’t have a will, their spouse will simply inherit everything, automatically. This is not true. There are some states where the surviving spouse receives 50% of a decedent’s assets and the children receive the rest. However, the children could be offspring from outside the marriage. Not having a will, makes your estate and your family vulnerable to unexpected claims.

A will must contain certain elements, which are determined by your state’s laws and must be signed in the presence of two witnesses. Without the correct formalities, the will could be deemed invalid.

Lawyers recommend that everyone have a will and an estate plan, regardless of the size of your estate.

Young parents, in particular, need to have a will, so they can name a person to be guardian of their child or children, if they should both die.

Details matter. In some states, if you make a list and neglect to name specifically who gets what, using the term “children” instead of someone’s name, your stepchildren may not be included. State laws vary, so a local estate planning attorney is your best resource.

You should also be sure to talk with your spouse and your children about what your intentions are, before putting your wishes in writing. You may not feel totally comfortable having the discussion. However, if your intention is to preserve the family, especially if it is a blended family, then everyone should have a chance to learn what to expect.

Wills do become binding, but they are not a one-time event. Just as your life changes, your estate plan and your will should change.

Don’t neglect to update your beneficiary designations. Those are the people you named to receive retirement accounts, bank accounts or other assets that can be transferred by beneficiary designations. The instructions in your will do not control the beneficiary designation. This is a big mistake that many people make. If your will says your current spouse should receive the balance of your IRA when you die but your IRA lists your first wife, your ex will receive everything.

Here are the four estate planning documents needed:

  • A will;
  • A living will, if you need to be placed on life support and decisions need to be made;
  • A healthcare power of attorney, if you cannot speak for yourself, when it comes to medical decisions;
  • A durable power of attorney to make financial decisions, if you are incapacitated.

A local estate planning attorney can help you create all of these documents and will also help you clarify your wishes. If you have an estate plan but have not reviewed it in years, you’ll want to do that soon. Laws and lives change, and you may need to make some changes.

Reference: WKBN 27 (March 14, 2019) “Attorney recommends everyone have a will in place to prevent avoidable issues.”

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Am I Cut Out to Be Your Power of Attorney?

Next Avenue’s article, “Saying ‘No’ to Power of Attorney Duty,” says that not everyone’s cut out to be a power of attorney (POA)., There are many reasons children and others may need to say no when asked. Becoming a power of attorney is a big job. This obligation shouldn’t be entered into without great consideration. With the POA legal instrument, a person named power of attorney is referred to as the “agent” or “attorney-in-fact,” and the person on whose behalf she’s acting is the “principal.”

While there are several combinations and varieties of power of attorney, there are two common ones. General durable power of attorney, also known as power of attorney for finances, allows the named agent to act on behalf of the principal to take care of that person’s finances like banking, paying bills, or selling a house. Health care or medical power of attorney allows the agent to make health care decisions, in the event the principal is incapacitated.

A common misconception about POAs, is that people think that if they’re named as an agent on a POA, they’ll wind up owing money for the principal’s unpaid medical bills. Not so. An agent is merely acting on behalf of another person, not making themselves personally liable. However, there are other reasons a person may want to decline being named power of attorney. Ask yourself these questions, when considering whether to commit to being someone’s power of attorney:

  • Can you drop everything for weeks or months and make critical medical decisions?
  • Do you have the emotional strength to make hard, life-and-death decisions?
  • How is the family dynamic? Do you have a sibling who’s quick to anger or who could be suspicious of your motives, when it comes to medical or financial decisions?

If you’re not up to it, and the person who appointed or plans to name you as POA is still capable, it’s best to talk directly with that person about your concerns. Be honest and let them know how you feel.

The possibility of a POA not being able to serve is highly likely, and that’s why everyone should designate successor agents. These alternates in a POA can cover the inability, or inevitability, that someone may not be able to serve.

If you really don’t want to be power of attorney, be honest with your family member and tell her, “I’m worried enough about you to tell you, that I’m not the right person.”

Reference: Next Avenue (September 11, 2018) “Saying ‘No’ to Power of Attorney Duty”

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Wills v. Trusts: What’s Right for You?

It’s a good idea to take the time and make the effort to create an estate plan to take care of your estate — no matter if it’s a condo apartment and a housecat or a big house and lots of money in the bank — just in case something unexpected occurs tomorrow. That’s the advice from AZ Big Media in the article “The pros and cons of wills vs. trusts.”

Estate planning is the area of the law that focuses on the disposition of assets and expenses, when a person dies. The goal is to take care of the “business side” of life while you are living, so your family and loved ones don’t have to pick up the pieces after you are gone. It’s much more expensive, time-consuming and stressful for the survivors to do this after death, than it is if you plan in advance.

You have likely heard the words “trust” and “will” as part of estate planning. What are the differences between the two, and how do you know which one you need?

A will is the most commonly used legal document for leaving instructions about your property after you die. It is also used to name an executor — the person who will be in charge of your assets, their distribution, paying taxes and any estate expenses after you die. The will is very important, if you have minor children. This is how you will name guardians to raise your children, if something unexpected occurs to you and your partner, spouse or co-parent. The will is also the document you use to name the person who you would like to care for your pets, if you have any.

Burial instructions are not included in wills, since the will is not usually read for weeks or sometimes months after a person passes. It’s also not the right way to distribute funds that have been taken care of through the use of beneficiary designations or joint ownership on accounts or assets.

Another document used in estate planning is a trust. There are many different types of trusts, from revocable trusts, which you control as long as you are alive, and irrevocable trusts, which are controlled by trustees. There are too many to name in one article, but if there is something that needs to be accomplished in an estate plan, there’s a good chance there is a special trust designed to do it. An estate planning attorney will be able to tell you if you need a trust, and what purpose it will serve.

Trusts can be used by anyone with assets or property.

A will can be a very simple document. It requires proper formats and formalities to ensure that it is valid. If you try to do this on your own, your heirs will be the ones to find out if you have done it properly.  If it is not done correctly, the court will deem it invalid and your estate will be “intestate,” that is, without a will.

Many people believe that they should put all their assets into a trust to avoid probate. In some cases, this may be useful. However, there are many states where probate is not an onerous process, and this is not the reason for setting up trusts.

A trust won’t eliminate taxes completely, nor will it eliminate the need for any estate administration. However, it may make passing certain assets to another person or another generation easier. Your estate planning attorney will be able to guide you through this process.

Whether you use a will or a trust, or as is most common, a combination of the two, you need an estate plan that includes other documents, including power of attorney and health care power of attorney. These two particular documents are used while you are living, so that someone you name can make financial decisions (power of attorney) and medical health decisions (health care power of attorney) if you should become incapacitated, through illness or injury.

Speak with an estate planning attorney. Every person’s situation is a little different, and an estate planning attorney will create an estate plan that works for you and protects your family.

Reference: AZ Big Media (March 21, 2019) “The pros and cons of wills vs. trusts”

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What is an Advance Directive and Do I Need One?

These are difficult questions to think about. However, they are very important, as every estate planning attorney knows. Should you ever become unable to speak for yourself, reports the Enid News & Eagle in the article “Veteran Connection: What you should know about advance directives,” there is a way to make a plan, so your wishes are known to another person or persons and by legally conveying them in advance, making sure you have a say, even when you don’t have a voice.

The advance directive helps family members and your doctors understand your wishes about medical care. The wishes you express through these two documents described below, require reflection on values, beliefs, views on medical treatments, quality of life during intense medical care and may even touch on spiritual beliefs.

The goal is to prepare so your wishes are followed, when you are no longer able to express them. This can include situations like end-of-life care, the use of a respirator to breathe for you, or who you want to be in the room with you, when you are near death.

It should be noted that an advance directive also includes a mental health component, that extends to making decisions on your behalf when there are mental health issues, not just physical issues.

There are two types of documents: a durable power of attorney for health care and a living will.

The durable power of attorney for health care lets you name a person you trust to make health care decisions when you cannot make them for yourself. This person is called your health care agent and will have the legal right to make these decisions. If you don’t have this in place, your doctor will decide who should speak for you. They may rely on order of relationships: a legal guardian, spouse, adult child, parent, sibling, grandparent, grandchild or a close friend.

A living will is the document that communicates what kind of health care you want, if you become ill and cannot make decisions for yourself. This helps your named person and your doctor make decisions about your care that align with your own wishes.

Another very important part of this issue: the conversation with the people who you want to be on hand when these decisions have to be made. Are they willing to serve in this capacity? Can they make the hard decisions, especially if it’s what you wanted and not what they would want? Do you want a spouse to make these decisions on your behalf? Many people do that, but you may have a trusted family member or friend you would prefer, if you feel that your spouse will be too overwhelmed to follow your wishes.

Reference: Enid News & Eagle (March 13, 2019) “Veteran Connection: What you should know about advance directives”

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