Friday, January 6, 2012

New Year’s Resolutions List: 1) Make/Update My Estate Plan

Why should something relating to death (I promise you won’t see this word again in the entire article) like estate planning be among your New Year’s Resolutions? The answer: 1) changes; 2) time sensitive tax savings; and 3) why not? 

1) Changes

A new year brings change with it. The most important changes are the changes in your family. If your list of resolutions also includes the words New Baby or Wedding on it, then it is time to start “estate planning.” Unlike what many people think, an estate plan is not just a will and a trust. Estate planning is not only about planning for after life, but also planning for incapacity. 

Make sure that the PODs (Payable on Death Beneficiaries) in your accounts are up to date. PODs are the people that will receive the funds in those accounts if you pass away. Accounts that commonly have PODs are bank accounts, IRAs, 401k, and life insurance policies. These accounts do not go through probate. Even if you update your will and name your new child/spouse in it, if you do not update the POD on your accounts, the named POD will be able to cash that account and your child/spouse will not receive the funds.
Conversely, in some accounts, like IRAs, your spouse is by law the default beneficiary, and he or she must consent in order to name someone else. This means that if you just got married, but still want your parents or children to be the beneficiaries of one of these protected accounts, your new spouse must consent. No… divorce is not the answer, estate planning is still cheaper. 

Regarding the new babies, revise your documents (or draft them) to include a designated guardian for your children in case you are ever missing. Yes, grandmothers fight over them (especially mothers-in-law).
Finally, draft/update advanced directives to plan for incapacity. Advanced directives are documents that describe your wishes for when you are still alive, but incapacitated. Advance directives include living wills, health care surrogates, guardian designations, and powers of attorney. Make sure the person in charge of pulling the plug is not your ex. 

The second type of change is changes in the law. This is the boring part; but don’t worry I’ll try to keep it short; I know there is a reason you didn’t want to go to law school. In the last couple of years Federal Estate and Gift Tax Laws have changed every single year. The Federal Estate, Gift, and Generation Skipping Tax exemptions, as well as their respective rates, have varied tremendously. Most wills calculate distributions to beneficiaries using formulas designed to take advantage of the maximum allowable tax exemption. Changes in these laws could make these formulas produce undesired results. Unfortunately, the tax exemptions, deductions, and rates are too complicated to include in this article, but they sure are important to keep up to date in your estate plan. 

State laws change often too. In the case of Florida, laws regulating Durable Powers of Attorney changed last year. This means that if you have a Durable Power of Attorney it is probably invalid now. Also be careful with generic forms found online or in office supply stores, these are usually designed by national companies that need to keep up with changes in 50 states at once.

2) Time Sensitive Tax Savings

There are tax-saving strategies, like contributions to your IRA, that can be taken advantage of, but only until April 15 (April 17 for the year 2012). An IRA (Individual Retirement Account) is a resource for planning for retirement. There are different types of IRAs, you may have heard the terms Traditional and Roth. Which one is best for you will depend on different factors which are outside the scope of this article. But their common purpose is saving for retirement. As an incentive for saving for your retirement, the IRS will allow you to deduct the amount of your contribution to the IRA from your income for income tax purposes.

3) Why not?

Why not start your estate plan already if you don’t have one. It is never too early to start your estate plan. There is actually an incentive to start it as soon as possible. The point of an estate plan is to plan for incapacity or when no longer here. If you knew when this will happen, there would be no need to plan.
If budget is the problem, you can start your estate plan little by little. If you have children first draft your will and trusts, you can name their future guardian in these. 

In addition, some attorneys will prepare your advance directives, like living will, health care surrogate, etc., free or for a reduced price when you prepare your will and trusts with them. 

Finally, be careful with generic forms found online or in office supply stores. Some states, like Florida and other Sun Belt states, are extremely conservative regarding will formalities. This is due to the large number of people that move to these states to retire. Simple things, like a second witness signing the will in a different room from the first witness, can render your will invalid. (This is from an actual case, see In Re Groffman, [1969] 2 All E.R. 108).

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