In general, when one is talking about an estate plan the documents to be discussed are:
- Durable Power of Attorney (someone to act for you) when you can’t or don’t want to act in a certain circumstance.
- An Appointment of a Healthcare Representative (to make healthcare decisions for you when you cannot make them yourself).
- A Living Will wherein you express your desires regarding end of life decisions.
- The Will. (What happens to your property upon death? Who do you appoint to take charge of those assets to see that they are distributed the way you want?)
A major misunderstanding is that Wills cover all your assets. They DO NOT. A Will only cover those assets in your name alone. Assets that have a named beneficiary or that are joint with another person are not distributed according to your Will. This is often a major misunderstanding, especially when the last parent dies and assets are joint with one sibling and a Will proclaims that all assets are to be distributed equally to all.
Decisions to use either a Will or a Will with a Revocable Trust depends upon such issues as:
- What if your spouse remarries and fails to execute a prenuptial agreement and then dies?
- Will all of your money end up with a stranger?
- It also depends on your children and their spouses – can your children manage money?
- Are they in financial difficulty?
- What if your child and their spouse divorce? Will some of your assets be lost from your grandchildren?
By using a Trust, you can control who receives your assets and when they are to receive them. These are all important decisions that require a great deal of thought and preparation.
401 pension plans and IRAs are often misunderstood. No income tax has ever been paid on these assets; therefore, both state and federal income tax is due when the monies are withdrawn. In addition to the income tax, if the estate’s assets are over the exemption limits then an estate tax AND an income tax must be paid. Depending upon the size of the estate, this could result in 70% of the asset being lost to the federal government.
“Rolling over an IRA to a surviving spouse allows distributions to be withdrawn from the IRA over the lifetime of the spouse, however, when the IRA goes to the children, depending upon their ages, that asset may become an “inherited IRA” which requires distribution from the accounts to the beneficiaries which distributions must be withdrawn with five years.