Investing
The Real Estate-Planning Crisis Isn't About Taxes
07.16.12, 6:00 PM ET
To hear estate planners and “death tax” opponents tell it, a crisis looms. Unless Congress acts by Dec. 31, the amount exempt from the federal estate tax will drop from $5.12 million to $1 million and the number of estates subject to the tax will jump 16-fold to 52,000 a year. But the truth is that Congress is likely to eventually approve a $5 million (and at least a $3.5 million) exemption retroactively, so most of these families may pay extra lawyers’ fees but not a big tax bill.
Meanwhile, the tax focus obscures the real estate planning crisis affecting way more families. Nearly 2.5 million Americans die each year, and many haven’t signed the basic documents needed to protect loved ones. A 2011 Associated Press survey found 64% of baby boomers didn’t even have a living will, which anyone over the age of 18 should have.
That’s right, 18. Few young adults need to set up a fancy grantor retained annuity trust to transfer wealth to future offspring before they’re even married--the way Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz did in 2008, at 24. But simple estate planning should start early and evolve with wealth and relationships. Here’s a life-stage guide.
YOUNG AND BROKE
In most states parents don’t have the authority to make health care decisions or manage money for their kids once they turn 18--even if they still have those kids on their health insurance plans and claim them as dependents on their tax returns, says Susan T. Bart, a lawyer with Sidley Austin in Chicago. That means if a young adult is in an accident and becomes disabled--even temporarily--a parent might need court approval to act on his or her behalf.
The risk is real. Accidents are the leading cause of death for young adults, and a quarter-million Americans between 18 and 25 are hospitalized with nonlethal injuries each year.
So it should be a rite of passage for every 18-year-old to sign a health care proxy (also known as a health care power of attorney) authorizing someone to make medical decisions on his behalf, if he can’t, and a living will (also known as an advance directive) expressing his preferences about certain aspects of end-of-life care. Up-to-date versions of these forms for each state can be downloaded for free from caringinfo.org.
Every adult, young or old, should also sign a power of attorney allowing someone else to take over financial matters if need be. These, too, vary by state and can be found online by searching “free [your state name] power of attorney form.” Or a lawyer preparing a parent’s estate plan might provide such routine documents for adult children at little cost. (Note: Since this could pose a conflict for the lawyer, parent and child will need to agree that the attorney can represent both.)
SINGLE AND EMPLOYED
If you’re a young worker struggling to pay off student loans, you probably don’t think of yourself as having any assets to pass on. But you still might have a 401(k) or life insurance policy at work. Make sure you have completed the beneficiary designation forms for these, since those forms (not a will) control who gets them.
Should you die without signing a valid will or living trust (“intestate,” in legalese), state law will determine how your other belongings and accounts--those without beneficiary forms--are distributed. In most states the assets of a single, childless adult go to his parents, if they are still alive. If you’d rather assets went to a sibling or charity, draw up a basic will. (Yes, you can probably do this with software and without a lawyer.)
IN A RELATIONSHIP
A growing number of unmarried couples in same-sex or heterosexual relationships are signing cohabitation agreements, covering how assets will be divided if they break up and sometimes including promises to provide for each other through an estate plan. Trouble is, most states don’t have laws explicitly recognizing such agreements--meaning blood relatives could challenge the survivor’s rights.
Therefore, it’s far better to record your wishes in a will. If you’re worried blood relatives might object, consider a living trust, too, since it’s harder for them to challenge. Like a will, a living trust spells out who gets your stuff when you die, but the assets in the trust avoid probate--the process through which a court determines that a will is valid. (For a trust to be of use, however, you must put assets in it.)
If you want your significant other (and not relatives) to make health decisions for you, make sure to update your medical power of attorney. Ditto your financial power.
Buying a place together? Pay attention to how it’s titled. For example, if you own it as “joint tenants with rights of survivorship” and one owner dies, the other automatically gets the whole house. But for tax purposes the entire property will be included in the estate of the first to die, which could trigger state or even federal estate taxes on the whole property. Alternatively, you might hold the property as “tenants in common”; if one owner dies, just that person’s share gets included in his estate. In this setup, if you want your share to pass to your partner you must say so explicitly in a will, or it could go to your parents, forcing your significant other to move.
Twenty-two states and Washington, D.C. have their own estate and/or inheritance taxes, and some are levied on relatively small amounts left to a nonspouse. So consult a lawyer about the best way to own (and pass on) property.
JUST MARRIED
Married couples have more built-in protections than unmarried ones. For example, provided both are U.S. citizens, they can leave each other at death (or transfer to each other while alive) an unlimited amount of property without worrying about estate or gift taxes. And if a couple has neither children nor wills, the surviving spouse will automatically inherit a large chunk or even all of a dead spouse’s property--the share varies with the state they live in, how the property is titled (remember, jointly titled property always goes to the survivor) and whether the deceased spouse’s parents are alive.
This often lulls married couples into postponing planning until they have kids. That’s a mistake, says Stephanie Heilborn, a lawyer with Fulbright & Jaworski in New York City. She points to the seven-year legal battle between Terri Schiavo’s husband and her parents. Schiavo slipped into a coma at age 27. A court named her husband her guardian, but since she hadn’t signed a living will, her parents were able to delay for years his decision to remove her feeding tube. She died in 2005, after the tube was removed.
Less dramatically, your state’s law governing what happens to your assets if you die without a will may differ from what you’d want done. In most states parents share the estate with a surviving, childless spouse; in some, siblings and more distant relatives have a claim on separately titled assets, too. (You can find details on your state’s law at mystatewill.com.) If your assets are modest, do-it-yourself forms and wills may suffice.
ON THE PARENT TRACK
Whether you’re married, single or cohabitating, and no matter how much you’re worth, if you’re a parent or about to become one, get serious about planning. The first step is to sign a will naming a guardian to raise your child. Otherwise, a court will likely decide.
Ideally, couples should agree on the choice of guardian, with each of their wills appointing the same person. But disagreements often delay planning, says Heilborn. One set of clients, she reports, finally decided if they died together (say, in an auto accident) on a date with an even number, the child would be raised by one set of grandparents, and if they died on an odd-numbered date, by the other. Weird, but better than conflicting wills.
Unless you or the prospective guardian is loaded, you’ll need life insurance to cover your child’s future expenses--if you’re a superhealthy 35-year-old female you can buy a $500,000, 20-year term policy for $235 a year. Be aware, however, that if you buy and own the policy, the proceeds will be part of your estate--even if your child is the beneficiary. So if your estate might be subject to state or federal estate tax, avoid this trap by setting up a life insurance trust to buy and own the policy.
While you’re at it, you’ll probably want a testamentary trust (one created by your will at your death) to hold any other assets you’re leaving minor children. You could name a guardian for the money, but a trust allows you to spell out how the money should be spent and at what age and under what conditions your child should gain control of any remaining cash. You can also use a trust to build in a little oversight--for example, naming both your child’s prospective guardian and someone else as cotrustees.
Finally, don’t assume (as many couples erroneously do) that if you are married with children (but no kids from previous relationships) all your assets will go to your surviving spouse to care for the kids you had together. That’s the law in only 16 states. Others give a more traditional one-third or one-half share to the spouse, with the kids dividing the rest. That can be inconvenient, and worse, for the surviving spouse.
Yes, you could use software to do all of this, but hire a lawyer. There’s a lot you could get wrong, and an experienced pro can offer practical advice on how best to protect your heirs.
HEADING FOR A DIVORCE
The time between a separation and divorce is tricky, estate-wise. By law, spouses are entitled to inherit a minimum portion of each other’s assets (a third to a half, depending on the state), and unless they waive that right in a prenuptial agreement, it continues until the divorce is finalized. Alyssa Rower, a matrimonial lawyer with Aronson Mayefsky & Sloan in New York, recommends that those who have separated immediately revise their wills to leave the soon-to-be-ex no more than the required minimum.
You won’t be able to change your 401(k) since by federal law that money goes to a spouse, unless he or she has signed a form giving up rights to it. And in many states once a divorce is started you can’t change the beneficiaries of a life insurance policy or IRA until it is finalized.
PLANNING??????TO REMARRY
Before a remarriage discuss estate plans. Especially when there are children from a previous relationship, do you want to leave everything to the kids, instead of to each other? If you want to benefit both grown children and your current spouse, decide whether the kids should receive an immediate inheritance or be forced to wait for the death of the surviving spouse. Whatever you decide, spell it out in a prenuptial agreement.
In a remarriage what a surviving spouse receives is often tied to the length of that marriage. For example, a prenup between Peter Jennings, the ABC News anchorman, and Katherine Freed, his fourth wife, provided that once they reached the eight-year mark her share of his estate would double, from 25% to 50%. (Most of the rest would go to Jennings’ two children from his third marriage.)
Jennings died several months short of their eighth anniversary, but his will, signed three months before his death from lung cancer in 2005, stipulated that no matter when he died, the couple would be deemed to have been married for more than eight years, giving Freed her 50%. The moral: Sign a prenup; you can later increase a new spouse’s inheritance, more easily than you can limit it.
NEWLY WIDOWED
A special feature of the estate law in effect for 2011 and 2012 (and after that, too, if Congress, as expected, makes it permanent) allows widows and widowers to add any unused exemptions of their most recently deceased spouse to their own. But this isn’t automatic. The executor of the deceased spouse’s estate must file a federal estate tax return, even if no tax is owed. The return is due nine months after death, with a six-month extension allowed. That makes the death of a spouse the wrong time to skimp on professional advice.
Other planning moves, too, should be made soon after a spouse’s death. Revise your will and living trust and name new beneficiaries for any retirement assets you inherited from a spouse--otherwise your own heirs could lose income tax benefits associated with these accounts.
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