Financial Planning for February 2002

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Will Your Will Stand the Test of Time?
Several years ago, you met with your lawyer and created your last will and testament just the way your CPA told you to. You set up a trust to hold the $600,000 so you wouldn’t lose the value of your estate tax exemption and left the rest to your spouse. At the time, it was a pretty good deal. Your estate would probably reach $2.5 million by the time you died and, with only the one son from your one and only marriage, it wasn’t an issue that the entire estate was all separate property since your wife would receive it by bequest.

Yes sir, you saved a bundle and your wife would be well set until the day she died. Not bad at all, but the really good news is you probably won’t have to worry about any of this since Congress repealed the death tax. Sure, it doesn’t fully go away for a few years, but you’re still relatively young and in great health. You’ll live to see the repeal.

You’ve only got one estate problem left – your CPA. He keeps sending you all this stuff about revising your plan. Doesn’t he know you’re all set? He’s the guy who did all the planning in the first place!

If this describes your situation, we strongly recommend you check a few things out before throwing away the next letter you receive on estate planning. Here are a few things you should know before deciding estate planning is a thing of the past.

First, you need to take a close look at your will. Does it really say the first $600,000 of your estate will go in a bypass trust? You’d better be certain because many of the wills written in the past used formulas which determined what portion of the estate, in dollars, the executor was required to put in the trust in order to fully utilize the exemption amount. For example, if the will was created when the exemption amount was $600,000 and it used a formula, then the amount required to be put in the trust if you died today could be $1 million.

As a quick refresher, let’s review some terminology. In the first paragraph, we referred to a trust to take care of your estate tax exemption. This trust, commonly called a “bypass trust,” is used to hold assets from your estate up to the amount of money that you can pass on to your heirs free from estate tax. That amount, by the way, for 2002 is $1 million.

Still, in the facts we’ve already mentioned, you’d still have plenty left for your spouse even after funding the trust. But here’s the rub. By 2009, the exemption amount will be $3.5 million. Assuming you die before the end of 2009, substantially all of your assets may be placed in a trust. If those assets are separate property and your spouse does not have significant savings, it is conceivable that your good intentions toward your heirs could bankrupt your spouse.

So, our advice to you is don’t assume your will is properly designed now, just because there’s a new law on the books and don’t assume you’ll live long enough to see the full repeal of the estate tax. While most commentators believe the estate tax exemption will remain at levels higher than they are today, few, if any, believe the estate tax will really be repealed.

While we’re on the topic of wills, don’t forget that it is not always your will that controls the disposition of your property. For most people, a large portion of their wealth at death includes assets controlled by contract, and not by the will. For example, you may want Great Aunt Harriet to have all of the proceeds from your estate, which includes a $150,000 IRA and a $1 million life insurance policy. Too bad you forgot to change the beneficiary designations and your ex-spouse is the named beneficiary because he or she will get the money – without the court having to sign off on the transactions.

Here’s another case. Suppose you bought a house with your ex-spouse and the deed has you both owning it under a joint tenancy with right of survivorship. Did you know that when you die, your ex-spouse automatically owns the all of property? Your heirs, if any, won’t get a thing. The same is true of any property held jointly with right of survivorship.

The fact that you have a will which testifies to your intentions is certainly a necessity, but don’t overlook the need to periodically review your life insurance contracts, investments, retirement plans, and other assets which may have different payout mechanisms.

Up to this point, we’ve been talking about your will. In other words, , we’ve been talking about something that will kick in only when you die. As unpleasant a thought as that may be, we assume you won’t really care what happens to your assets at that point. Now, let’s talk about some documents that can affect the way you live.

One of the most powerful mechanisms you have for making sure your wishes will be carried out when you’re no longer able to do it yourself is the Durable Power of Attorney. A Durable Power of Attorney allows you to designate now, who’ll handle your affairs and carry out your wishes. To determine who is to have that power, you need only ask yourself, “Who can take care of me and cares more about me than my money?” If this sounds cynical, we’re sorry. But, depending on state laws and the wording of the document, a Power of Attorney can give someone absolute power over your assets and over your life.

If it sounds scary to you for someone to have this much power over you, no matter who they are, it should. No one wants someone else to control their lives. However, it sometimes becomes necessary and, if you don’t make the choice, the choice could be made for you. In some states, the rule isn’t who is your closest relative; it’s who is best qualified to take care of your affairs.

Imagine that you’re clicking along at a respectable 100 miles per hour and run into a telephone pole. While you’re in a coma for the next 25 years, your unemployed brother who loves you fights a court battle with an unscrupulous investment advisor who needs your money to cover up the scam he ran on some gullible investors. The investment advisor wins because your state’s law awards the job to the person “best suited” to handle your affairs. When you come out of the coma, you’re presented with a bill for a billion dollars because the investment advisor lost all your money for you.

Is this a nightmare scenario? Sure it is, but it can happen in some states. Your best bet is to make your own decisions while you can.

Another document you may want to execute is a living will. In its simplest form, the living will states that no one is to take “extraordinary measures” to keep you alive. Generally, if two doctors can certify that you have an irreversible and terminal condition, then the living will goes into effect. This document has become so important that Federal law requires hospitals to inquire of patients if they have a living will and, if they don’t, educate them about the living will and ask if they want one.

One way to avoid having a living will is to give the person with your Durable Power of Attorney the ability to make medical decisions for you also. If this is the route you take, be certain they understand your wishes -- making the decision to pull the plug is hard enough. It would be a terrible burden for someone to have to make that decision without knowing what your wishes were.

It seems our time has come to an end this month. We hope that you now understand that the need for planning your estate and putting the mechanisms in place to carry out your will did not end with the 2001 tax act. In fact, those needs still exist and are as critical as ever. Give us a call so we can review what you have in place and make sure it still meets your desires.

Have a great month!!!


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