Estate planning for everyone

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You don’t have to be Thurston Howell III to require an estate plan, says Ed Gjertsen, Illinois chapter president of the Financial Planning Association.

Vice president of Mack Investment Securities, Gjertsen says most of his clients are anxious to jump right into investing, but he tries to get them to slow down and cover the fundamentals first. “The estate plan is the foundation for any financial plan,” he says.

To prepare for all contingencies, you need to put in place a handful of documents. Together they comprise an estate plan, and getting these pieces in place can save you and your loved ones a lot of time, money and heartache.

Components of an estate plan
Different documents of an estate plan serve different purposes.
Estate plans
  1. Living wills
  2. Advance medical directives
  3. Powers of attorney
  4. Wills
  5. Trusts

1. Living wills
Just as the castaways had no idea what they were getting into when heading out for that infamous three-hour tour, you never quite know when an accident or unexpected health crisis might leave you incapacitated with no hope of return.

The living will details your wishes regarding the extent to which you want medical science to keep your body alive. If you don’t think this through and decide for yourself, you leave it up to family members to make this excruciatingly painful decision for you.

Living wills work in conjunction with other advance medical directives, such as medical powers of attorney, which authorize someone to make medical decisions on your behalf if you’re not capable of doing so.

The living will usually takes precedence over medical powers of attorney, says Gjertsen. “A person holding the power of attorney may want to keep the individual alive at all costs, but the living will says if there’s no hope, just pull the plug.”

2. Advance medical directives

These include medical powers of attorney and living wills, as well as health care proxies.

Married couples may need these documents less, because doctors generally confer with spouses about medical decisions. But it’s best to be on the safe side and get this paperwork done when you sit down to do your estate planning with an attorney.

The health care proxy or surrogate document names someone to provide informed consent regarding your medical treatment if you’re not able to do so for yourself. Even though the family often does have a say, Gjertsen cautions clients that because of the relatively new Health Insurance Portability and Accountability Act, or HIPAA — the privacy act for health care — you won’t know until it’s too late whether an institution will let your family or spouse act on your behalf.

“But for a single individual, having a power of attorney for health care is imperative,” says Gjertsen.

It’s helpful to designate one person with whom you’ve had important conversations to act in your best interests — especially when family members are at odds about your care.

“The Terry Schiavo case in Florida really brought to the front powers of attorney for health care and living wills and the like,” says Gjertsen. “Who’s going to decide about your health care if you cannot speak for yourself?”

3. Powers of attorney

Unless you live on an island or are otherwise off the grid, it’s smart to set up a power of attorney. If you become incapacitated, someone will need to act on your behalf to pay the mortgage and other bills.

“For medical decisions, doctors can always look toward significant others and family for advice, but because of financial institution rules, durable powers of attorney really are required,” says attorney Peter Blatt, president of Blatt Financial Group in Palm Beach Gardens, Fla.

A durable power of attorney allows someone else to make financial decisions for you and to control all your assets outside of any trusts you have created. These assets include everything from IRAs to your house and the power includes the ability to sign off on a tax return, says Blatt.

Most states have two types of powers of attorney. The first type is a durable power of attorney which becomes effective as soon as you sign it. The second type is called a springing power of attorney because it springs into effect when a person becomes incapacitated.

“The regular power of attorney gives to the person who has the power, power to take anything they want from you,” Blatt says. “They could literally go to your bank and say give me all the money. The springing requires you to become truly incapacitated first. So most people like the springing power of attorney.”

Married persons with separate accounts will have difficulty accessing their spouse’s account without this power. Says Gjertsen: “Let’s say there’s an account in the husband’s name. If his wife calls and says, ‘My husband’s in the hospital and I need to move some money from this account,’ then there’s nothing I can do for her. That may seem unreasonable, but now let’s consider the nefarious alternative where a wife says, ‘Could you please cut a $100,000 check from my husband’s account,’ and then she runs off.”

4. Wills

Everyone, even Gilligan, should at minimum have a will, according to our experts. And even though it works in Hollywood, don’t count on a simple, handwritten note to do the job. Called a holographic will, such a note is as flimsy as a grass hut in a hurricane — and it’s expensive to prove its authenticity.

The last will and testament appoints a personal representative or an executor to administer the estate. The will controls your tangible personal property and determines who receives items, such as furniture, jewelry, art, boats and cars.

“It’s my goal never to let a client die without a will,” says Gjertsen. “However, wills become exceptionally important for couples with kids.” This is partially because wills also appoint a recommendation for guardianship of your children.

“It befuddles me that some of my peers don’t have a will. I say, ‘You’ve got kids. Your kids are 13 or 10 — who’s going to take care of them?'” he says.

People have misconceptions about how guardianship of their children will be handled in the absence of a will.

“They think it’s already decided, but it’s not. If something happens to you and your spouse, the court decides who gets the kids. And my guess is, if both of you are gone, as much as your parents may get along, when it comes to the kids there’s going to be a fight, especially if there’s a lot of money involved,” says Gjertsen. “Look at the Anna Nicole Smith ordeal. Not to bring tabloid stuff in, but it’s a great example of why estate planning is so important.”

Curtis Chen, a certified financial planner at Chen Financial Group in Belmont, Calif., agrees. “If there’s a fight, the kids are in foster care until the court decides who gets them. They wouldn’t go to the grandparents or another family member in the meantime. You’d rather choose somebody that you know, that might not be perfect, than have the court decide.”

Chen suggests creating a short list of people who would be assigned guardianship. “This is usually a separate document but it can go in a will,” he says.

There are two types of guardians: guardians of property and of person. “One person can take care of the property of the minor; the other takes care of the personal well-being of the minor. A lot of people will separate the two. That’s very popular nowadays,” says Blatt.

Wills do not control assets in retirement plans, annuities or life insurance policies, for which you fill out forms to designate beneficiaries. These assets should also be considered components of your estate plan.

For the full scoop on wills, see Bankrate’s Guide to wills.

5. Trusts

In our collective imagination, even the castaways’ assets were run through probate back in the states after their presumed deaths. Unless they planned ahead and moved ownership of their property to living trusts, even those with meager estates were subject to probate and its accompanying fees. Anything you can move into a trust will avoid the expensive, time-consuming probate process.

Trusts sometimes remove assets from your personal estate and are subject to different tax laws. “It’s not the rich who pay estate taxes, it’s those who don’t seek counsel,” says Gjertsen.

Think you’re not rich enough to worry about estate taxes? Not so fast, says Gjertsen. “Even though we’re going through a soft period in real estate — you take a house, retirement plans, insurance and lump it all together, you get up to some substantial sums.

“Uncle Sam is giving us $2 million each that we can give to an heir, so by using trusts, a husband and wife can effectively give $4 million to heirs without paying estate taxes if the estate is set up correctly.”

In 2009, the exemption amount is $3.5 million per person, and in 2010 the estate tax is repealed. However, unless Congress acts, the following year it reverts to $1 million.

Besides avoiding probate and probate costs, trusts allow for more control and protect your heirs’ inheritance. They’re also particularly important if your spouse is not a U.S. citizen.

For more information, read Bankrate’s articles about the benefits of trusts and types of trusts.