The following is adapted from Keep It Simple, Make It Big.
Especially when you’re young, it’s easy to put off thinking about your death, but death is a certainty. Whether you like it or not, you will eventually die. At that point, you will lose all control over what happens to your estate—unless you prepare ahead of time.
If you want to have a say in what happens with your money, you can’t wait until you die or become otherwise incapacitated. You need to act now. Preparing for your death is not the most enjoyable task, but it is necessary.
Specifically, you need to create a last will and testament, a durable power of attorney, and a plan for any potential taxes.
Last Will and Testament
Everyone should have a will. Your will is the basic document in which you determine how your estate will be distributed and to whom.
In creating your last will and testament, you will want to consider:
Who will take care of any minor children
Who will get what percentage of your assets
Who will receive any collectibles or special items
Who will be the executor of your estate
Don’t die without a will. The government then will decide who gets what, including the care of your children.
Every financial plan I complete tells clients to get a will if you don’t have one or make sure that it reflects your wishes if you do have one. I recently lost a client who had a stroke less than a year after retiring. Last time I saw her in my office, I said, “You need to marry your twenty-five-year life partner.” I recommended a will many times.
I got the call from her partner after she died. All the beneficiary forms were in place, and the corporate pension had a certain period payment on it that protected the partner. The problem: her house, owned solely by her, was to go to her father, who happened to be spending down assets, suffering from dementia, and would likely hit a nursing home.
Get a will!
Durable Power of Attorney
Everyone should also have a durable power of attorney. This document allows someone to make decisions on your behalf and take care of your finances should you become unable to do so for yourself. It can be a general power of attorney, allowing a person to do pretty much anything you could do, or a limited power of attorney, which limits them to, say, paying the light bill.
If you don’t have a durable power of attorney and become incapacitated, a court will appoint a person. Your affairs can be contested and will become public. Don’t let this happen. Get a durable power executed and in place.
You will need a healthcare directive and a living will as well. A healthcare directive is a durable power of attorney that grants someone the power to make healthcare decisions for you should you be unable to do so for yourself. A living will documents your intentions regarding end-of-life issues.
A Tax Plan
There are two types of taxes that might need to be paid after death: estate tax and income tax.
Most people no longer face federal estate taxes thanks to recent legislation that raised the amount an individual could pass tax free to $11,580,000. It’s double for couples. In addition, a husband and wife can transfer an unlimited amount of assets to each other. Taxes will be due on the second death.
However, nineteen states have estate or inheritance taxes, some as low as $1 million. So it still may be an issue at the state level.
Any assets over the set amount are subject to an estate tax, payable by the estate. The estate is valued on the day of the person’s death, and the tax is due nine months later.
The way to reduce estate taxes has always been to minimize one’s estate. There are several ways you can do this:
Each person can gift $15,000 a year to as many people as they choose, without any tax implications.
Qualified education expenses do not count as a gift for tax purposes. For example, Grandpa Tom could pay Harvard tuition for grandchildren Jane, Jennie, and John at $70,000 apiece and still gift them $15,000 each in the same year.
Charitable contributions are fully tax deductible in the year in which the IRS deems the contributions given, subject to limits as a percentage of taxable income.
Aside from estate taxes, your heirs may need to pay income taxes when withdrawing money from yet-untaxed assets, like traditional IRAs, the investment gains in annuity contracts, and the untaxed value in employer plans. Strategies to address this include Roth conversions and life insurance to replace the income tax owed.
For most people, this will be an issue for the next generation to figure out. Still, if splitting assets equally among children or other beneficiaries, you should consider the taxes due on certain assets to determine and adjust inheritances.
Stop Procrastinating
Too many people put off creating a will, durable power of attorney, and tax plan. “I’m not going to die tomorrow,” they think. “I still have time.”
They keep saying that, until they run out of time. Then it’s too late. Their loved ones are left to pick up the pieces. I’ve seen too many people whose wishes weren’t honored after their death, for the simple reason that they didn’t take the time to get the right legal documents and plans in place. It’s heartbreaking every time.
Don’t wait until it’s too late. Stop procrastinating, and get a will, a durable power of attorney, and a tax plan in place now.
For more advice on financially preparing for your death, you can find Keep It Simple, Make It Big on Amazon.
Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202210-272633