Devices for Answering Your 5 Estate Planning Questions

Estate planning arranges handling yourself and your assets when you become sufficiently disabled and when you die. In this article I suggest strategies to use in your response to the 5 key estate planning question.

The 5 key estate planning questions are:

1. Do you want 'a say' in how you should be cared for if you become mentally or physically incapacitated to the extent you can't give input?

2. Would you like to eliminate needless loss of some or all of your assets when your long term care needs become enormously expensive so they cut deeply into your assets - which you wanted as a legacy for your beneficiaries?

3. Do you want to be sure that your assets go to the people you choose to get them when you die?

4. Would you like to minimize excessive tax loss on what you want to give your beneficiaries?

5. Do you want to prevent public exposure, costs and delays that probating your assets will produce?

What devices or strategies can you use to address each question?

The first two questions deal with you and your finances while you're living but sufficiently disabled not to be able to personally address what must be decided. Let's take those together:

If you're severely injured by heart-attack, stroke, or accident that decisions must be made about resuscitation or extraordinary care to keep you alive, you should create a health care proxy or health care power of attorney. Here you appoint someone you trust to make those decisions in conformity with what you would want to be done.

A living will also would express what you'd want done. Of course you must create these and speak with your appointee so he knows your wishes.

Also, if you're incapacitated but will remain living, you'll want to map out how you'll be taken care of as well as how someone should handle your finances and assets. Talk to someone to handle both of these or someone for each.

You can use a living will to hold your assets and its trustee can carry out your financial-related wishes or you can appoint a health care power of attorney to oversee what kind of care you should get. Or, you can set-up a springing power of attorney to come into action when you become mentally disabled to handle both finances and other decisions for you.

The need for costly long term care is a very real possibility for many elderly. Unless you have a lot of wealth to pay for your long term care without exhausting your legacy, you can do one of two strategies. Either you can

* buy long-term-care insurance to reduce or eliminate such costs, or

* arrange to transfer most of your assets out of your possession so that Medicaid will pay for your long term care costs.

If you do the latter, you must gift it away or put it in an irrevocable trust at least 5 years before requiring long term care from Medicaid.

The last three questions deal with efficient disposition of your assets in light of your death. Let me take them in turn.

Beneficiary issues:

To make sure your assets go to the beneficiary of your choice you can use a will, a trust, or a joint ownership arrangement for those assets that are outside of devices that have beneficiaries designated for them. Those devices are insurance policies and government-regulated retirement plans (like IRAs, and 401(k)s).

Minimizing estate and gift taxes:

When you die, you have to pay estate taxes on whatever assets you own or control. And you must pay gift tax on the value of any gifts you gave away during and at the end of your life. Both these taxes have exclusion levels below which not tax is imposed.

You can reduce or eliminate such taxes several ways. These include giving away your assets slowly over the years using the annual gift tax exclusion ($13,000 in 2009) or setting up an irrevocable trust to gift to annually. These take assets out of your estate at low or not gift taxation.

For assets left in your estate, set up a by-pass trust to receive assets to the level of your estate tax exclusion level. Transfer the remaining assets to your spouse exempt from taxes through the unlimited marital deduction.

Avoiding probate:

Probate is not only a public process but a time-consuming and costly one. You may wish to avoid the probate process to keep your holdings secret, or to get your assets to who you want to have them.

You can avoid probate by not owning any assets solely in your name. Joint ownership (not tenants in common) isn't probated. Putting everything in a revocable (aka living) trust takes it out of your name too.

So, you can see that everyone needs to do some estate planning.