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Editor's note: This article appears in Kiplinger's special issue Success With Your Money.
Deciding how to leave assets to your heirs can be difficult even for the most agreeable of spouses, as Bud and Jacqui Reinfeld can testify. The Reinfelds have several nieces and nephews they would like to provide for, and when they got down to planning their estates after 35 years of marriage, they figured it would be easy.
And it was, for the most part. Both wanted to make the division as equitable as possible. But when it turned out that Jacqui had already promised their house to one of their nieces, that presented a problem.
To work things out, the Reinfelds, who live in Los Angeles, sought help from Michael Eisenberg, a certified public accountant and financial planner. He helped them draw up a formula that takes into account a possible increase or decrease in the value of the house. “People are amazed at what they don’t know about estate planning,” says Eisenberg. “Once they learn about what they can do, they loosen up a bit.”
Says Bud Reinfeld, “You have to be able to talk to someone who can help you work through the issues.”
Pieces of the plan
As the Reinfelds discovered, an estate plan should be customized to fit your specific goals and circumstances. But every well-crafted plan should include the following pieces:
A will. Nearly 60% of Americans don’t have a will, according to a survey by Lawyers.com, an online database of lawyers from legal publishers LexisNexis Martindale-Hubbell. A will lets you distribute your assets as you choose. The person you name to be your executor or personal representative will gather your assets after your death, handle any probate proceedings and ultimately distribute your assets to your heirs or trustees.
A durable power of attorney for financial matters. Only 26% of those surveyed by Lawyers.com have this valuable document, which names someone to handle your financial affairs if you are unable to do so. A durable power of attorney can go into effect as soon as it is signed. But most states permit a “springing” power that takes effect only if you become incapacitated.
A living will and a durable power of attorney for health care. A health-care power of attorney names someone to make health-care decisions on your behalf if you can’t. It applies even if you’re temporarily incapacitated, by an auto accident, for example. A living will spells out your wishes regarding life-sustaining treatment. It generally takes effect only if you become terminally ill and can’t speak for yourself, or if you are in a persistent vegetative state.
Despite the publicity generated by the case of Terri Schiavo, the Florida woman whose husband and family battled over her treatment after she had been in a persistent vegetative state for 13 years, fewer than 30% of Americans have drafted these documents.
A review of beneficiary designations. Beneficiary designations on assets such as life-insurance policies and IRAs can foil a great estate plan if they contradict other provisions in the plan. Beneficiary designations always take precedence.
Some estate plans include additional documents, such as a revocable living trust. You create a living trust and transfer ownership of your assets to it during your lifetime. You can generally be your own trustee and name a successor to take over if you can’t manage your own affairs. Because the trust is revocable, you have the option of changing or even ending it at any time.
You still need a will, however, to name a guardian for minor children or to direct that any of your assets that did not get transferred to the trust during your lifetime be “poured over” into it after your death.
All of the assets you put in a living trust before your death avoid probate, which is the legal process for gathering your assets after death, paying your debts and distributing the property to your heirs. But a living trust does not help you save on income taxes; you continue to pay income tax on the trust’s earnings on your personal Form 1040. The assets are also part of your taxable estate.
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