Your Financial Future: Estate planning more important than ever
The experience from the pandemic over the last 15 months should have made us more aware of the need for estate planning.
This is a subject that many people do not like to think about or put off and plan to get to it later. Over 500,000 people lost their lives during this crisis and many of them probably were not prepared.
The first step is to have the legal documents prepared. This might include a will, power of attorney, trust, health care directive and a living will. These documents will allow you to let your loved ones know your wishes, potentially save on taxes, administer the estate, pay final bills and distribute assets as you want.
A power-of-attorney document is especially important if someone other than a spouse must make decision for you when you do not have the capacity to do so yourself. It can also be important to have for children over 18 who are not married and away from home. Without one, you may not be able to access medical records or help make decisions.
Some people have amended their living wills since the pandemic started. People who did not want to be kept alive by a respirator may want to grant an exception for some condition such as COVID-19. Also remember beneficiary designations override anything in your will. Your will may say everything is split 50//50 between the two children, but if the life insurance policy says one is the 100% beneficiary, he gets all of the death benefits and possibly half of everything else.
Properly titled beneficiary designation can avoid probate and cost which may be 2% to 7%. The assets often move faster and there is no public record of your wealth. Remember, some assets are more valuable than others. Qualified funds such as 401(k) s, IRAs and 403(b)s are partly owned by Uncle Sam and he will want his share. Non-qualified funds and specially treated accounts such as a Roth do not have the same tax consequences. The Secure Act requires that both qualified and Roth accounts be distributed before the end of the tenth year after death. Spouses have more generous choices.
People worked hard and saved to gather assets. Sometimes beneficiaries just do not recognize hard work when receiving an inheritance. I recently witnessed a case where someone paid $30,000 more in taxes than was necessary just to have immediate access to the funds. The taxes were paid out of the inherited funds so it took no work on the part of the beneficiary.
It is important that you have some form of record to let beneficiaries know where assets are located. In our office we use a survivor guide to help simplify the process. Without this, it is much harder on your family during very emotional times. If you have a special needs child, you will probably need additional planning.
Federal estate taxes have not been an issue for most families under the Trump tax plan. You could have about $23 million before the 40% federal estate tax becomes an issue. There is some talk in Washington, D.C., about lowering that to maybe $3 million in the future. That would create a planning issue for many more families. This will be especially challenging to people who own most of their assets in 401(k) plans. If you are in this situation, it is important to start plan now.
While everyone knows they will need an estate plan someday, why not make sure that you start preparing today? It could save a lot of problems later and maybe a lot of taxes.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.